ECONOMIC BAILOUT US financial Calvary or confusion?
By Sin-ming Shaw
Are you as confused as I am by what I read in the papers these days about the financial crisis?
President Obama has called Wall Street compensations and bonuses "shameful." A great start. But he wants to put a cap of $500,000 a year on senior executives of those firms receiving government money.
My question is, why do we need to keep them at all, let alone pay anything? For their "experience"? The firms they manage imploded on their watch.
These "geniuses" borrowed short-term money 25-30 times their capital to expand. In a bubble, their gamble paid off. But any two-bit real estate speculator in Hong Kong knows how to do that. In the end they crashed because they failed to manage the risks of having put on too much debt.
Timothy Geithner, the new US Treasury secretary, finally acknowledged in his February maiden policy speech an elementary truth: "There were systematic failures in the checks and balances in the system, by boards of directors, credit rating agencies, and by government regulators."
Yet we see no mass resignations on those Wall Street boards. Not even a symbolic handful.
Citicorp has among its board members the chair of Alcoa, Xerox and an MIT professor who was a former director of CIA. Goldman Sachs's board has an Ivy League president, a Harvard Business School professor and the world's richest steel magnate from India. Morgan Stanley has deans of famous business schools, a university president plus a group of dazzlingly successful business leaders.
Were they not there to oversee what the senior managements were doing with other people's money? Clearly not. Clearly, they agreed to serve in theory on behalf of the public just to glow and to reflect each other's success. They just loved to be loved.
Has anyone been keeping tabs on how much is needed to pull the world's largest economy out of its free fall?
Henry Paulson, ex-Treasury secretary, said his $700 billion was absolutely necessary lest chaos ensued. We now found out $300 billion is yet to be spent. We also suspected the bailout was done in a cavalier fashion reminiscent of how former Defence secretary Donald Rumsfeld managed the war in Iraq. No one more authoritative than the current Treasury secretary has confirmed our suspicion: "Our work begins with a new framework of oversight and governance of all aspects of our Financial Stability Plan."
So this new plan is to replace the former plan that lacks transparency and competence.
But what is it? Before we even get into the details, I am already befuddled by the actual size of the plan.
President Obama has asked for $825 billion for his rescue package. Is it enough? He keeps hinting the road ahead would be long and hard. So, does that mean he might need a third stimulus package?
Right now Mr Geithner is going to create a Financial Stability Trust Fund plus a Public-Private Investment Fund to "help get private markets working again". What exactly are they going to do and with whom? The same Wall Street folk saved by public money while paying themselves bonuses? The same titans who came out yesterday together to insist that their bonuses came from a "separate" pool of money?
We may not be valedictorians at our high schools, but we do know money is "fungible." You can't separate "new" soup poured into a pot of "old" soup. Soup is soup. New horse manure mixed with old manure is still horse manure.
So, how much is the new rescue going to cost really? I see numbers ranging from $2 trillion all the way up to $10 trillion. So how does Obama's $825 billion fit in?
We still don't even know why exactly the Paulson plan is not working out and why these two ventures would. All we know is that it isn't working.
Yet none of this basic information was forthcoming from the all-important maiden speech from the new Treasury secretary.
The already jittery financial markets hate uncertainty. So, they tanked following Mr Geithner's speech.
How are we to think of all this?
Are we clueless? But what if our confusion reflects the reality of economic thinking at Team Obama?
Timothy Geithner was the former head of the New York Federal Reserve Bank under whose watch Wall Street imploded. Wall Street was his brief.
Congress may have given him a pass. Yet it is clear that he, a protege of Robert Rubin and Larry Summers, failed to prevent toxic assets from becoming a major bread and butter of Wall Street and then failed to prevent an implosion by reigning in the rampant greed on Wall Street. It ran amok with the manufacturing and the distribution of those assets by Wall Street.
Timothy Geithner is arguably part of the problem. We are now to expect him to become the solution?
President Obama promised to clean up Washington. No more politics as usual. No more incompetence.
There is goodwill wishing him success from all corners of the world. Global economic stability is importantly dependent on a US economic recovery. Yet his economic team is filled with veterans of failed battles. All we get so far is a lot of confusion.Not a good omen.
Sin-ming Shaw is a private investor and a former visiting scholar at Princeton University.
Price of trust
By Sin-ming Shaw
The world's most valuable commodity is in increasingly short supply.
Updated on Jan 31, 2009
A friend recently asked a seemingly naive question: "What is money? How do I know I can trust that it is worth what it says?" We learn in Economics 101 that money is a medium of exchange. But why do we accept that? Bank notes are just pieces of paper with numbers attached. We accept it because we collectively decided to believe the government when it said 100 is 100, not 10 or 20.
Money, therefore, is about trust. A society cannot function without trust. We even obey our leaders' orders to fight and die because we trust their judgment. We entrusted our careers and our money to those who run the Citicorps and Goldman Sachses of the world because we thought their leaders would be fair to their employees and clients, and honourable in their business practices. We do not grow up to work for crooks and
Once that trust is broken, bad things happen. Money ceases to have credibility. Leaders become figures of contempt, or worse. As I write, inflation in Zimbabwe is at an unimaginable level; over 500 quintillion per cent per annum. One quintillion is 1 followed by 18 zeroes. A year ago, it was "only" 100,000 per cent. This is what happens when trust is destroyed.
Zimbabwe, luckily, is not a country of consequence. But the Weimar Republic, and China more than 70 years ago, were. One went for Adolph Hitler and the other for Mao Zedong to restore trust. Need I say more?
Are we seeing an erosion of trust in America and Britain? The first warning sign surfaced in the case of the 2001 bankruptcy of Enron. Its fraudulent accounts were certified by Arthur Anderson. Now, Satyam in fraudulent accounts were certified by Arthur Anderson. Now, Satyam in India - audited by Pricewaterhouse-Coopers - has been found to be missing billions in cash. If we cannot rely on the best auditors, can we continue to trust chartered accountants?
Bond rating agencies have issued misleading ratings on companies in questionable health. Can we again trust a triple-A rating issued by, say, Moody's?
Banks have been keeping our money ever since the 14th century when the Florentines invented banking. RBS, the Royal Bank of Scotland, was founded in 1727 when laissez-faire philosopher Adam Smith was only four. It has just become a nationalised state-owned enterprise, because its incompetent leaders acquired overpriced banks filled with toxic assets. Citicorp, Bank of America, Goldman Sachs, Merrill Lynch and other symbols of "excellence" would have all collapsed but for public bailouts. We always thought these firms were managed by people smarter than you and me.
We grew up admiring leaders such as Robert Rubin, Henry Paulson and John Thain. Mr Rubin, a former US Treasury secretary and exchairman of Goldman Sachs, presided over the collapse of Citicorp while taking home US$150 million in bonuses. A reward for his "performance"? Mr Thain, now in disgrace, helped himself and his
Merrill Lynch staff to US$4 billion in cash bonus payments even after he had to sell the firm to Bank of America to save it from bankruptcy. Mr Thain was a former president of Goldman Sachs and was caught spending US$1.2 million to decorate his new office. Bank of America had to fire him to placate a growing revulsion over the out-of-control
Wall Street culture of entitlement even as the meltdown continues.
Mr Paulson, the outgoing Treasury secretary, ex-Goldman Sachs, left a loophole in his rescue package big enough to drive a lorry through. He allowed his former friends and colleagues on Wall Street to pay themselves billion-dollar bonuses while keeping those firms afloat with taxpayers' money.
Just this week, the technically bankrupt Citicorp's senior executives were about to buy a new US$50 million luxury French jet for themselves until the White House stopped the incorrigible Wall Street kleptomania. Does the word "decency" mean nothing to such people?
The universities these men attended - Harvard, Yale, MIT, Dartmouth - have been magnets for the world's finest young minds because we all thought these institutions could instil wisdom, insight and character.
It behooves parents all over the world to re-examine their often manic obsessive craving for "branded" universities, pushing their children to seek admissions at those places as if an Ivy League degree was an end in itself.
But we now know that Wall Street's titans were never all that smart. They failed the only test that counts. They took their firms to ruin, saved only by money from those who couldn't get a senior job on Wall Street or gain a place at Harvard.
These Wall Street princes were smarter, however, in one way: they managed to pocket a fortune while the rest of us are stuck with cleaning up the mess they left behind. Bernard Madoff, from the downmarket New York City neighbourhood of Queens and a graduate of Hofstra College, may well end up behind bars, but none of the titans of Wall Street with blue-chip pedigrees will be singing Jail House Rock to their inmates.
History has not been kind to societies that have lost trust in the integrity of their leaders and institutions. We need to save our capitalist system from its abusers. Or else.
Sin-ming Shaw is a private investor. Copyright: Project Syndicate
The Death of Trust
By Sin-ming Shaw
BANGKOK – A friend recently asked a seemingly naïve question: “What is money? How do I know I can trust that it is worth what it says it is worth?” We learn in introductory economics that money is a medium of exchange. But why do we accept that? Banknotes are just pieces of paper with a number attached to them.
We believe in banknotes because we collectively decide to trust the government when it says that 100 is 100, not 10 or 50. Money, therefore, is about trust, without which no society can function.
Just as we obey our leaders’ orders to fight and die because we trust their judgment, we entrust our careers and our money to those who run Citigroup and Goldman Sachs and other such banks, because we believe their leaders will be fair to their employees and clients, and honorable in their business practices. We do not grow up wishing to work for crooks and liars.
Once that trust breaks, bad things happen. Money ceases to have credibility. Leaders become figures of contempt or worse.
As I write, inflation in Zimbabwe has reached an unimaginable (if not unpronounceable) level of more than 500 quintillion per cent. One quintillion is one million trillion. A year ago, inflation was “only” 100,000%. This is what happens when trust vanishes.
Fortunately, Zimbabwe is not a country of real consequence for world stability. But the Weimar Republic and China in the 1940’s were. One opted for Hitler and the other for Mao Zedong to restore trust. So the risks are clear.
Are we now seeing an erosion of trust in America and in the United Kingdom?
The first warning sign surfaced in 2001, with the bankruptcy of Enron in the United States. Its fraudulent accounts were certified by Arthur Andersen. Now, India’s Satyam, audited by PriceWaterhouseCoopers, is found to be missing billions in cash. If we cannot rely on the best auditors, can we continue to trust chartered accountants?
Bond rating agencies have issued misleading ratings on companies in questionable health. Will we ever again be able to trust a triple A rating issued by, say, Moody’s?
Banks have been holding our money for safekeeping since the fourteenth century, when the Florentines invented the practice. The Royal Bank of Scotland, founded in 1727, when laissez-faire philosopher Adam Smith was only four years old, has just become a socialist state-owned-enterprise thanks to the bank’s incompetent leaders, who acquired over-priced banks filled with toxic assets.
Citicorp, Bank of America, Goldman Sachs, Merrill Lynch, and other symbols of “excellence” all would have collapsed but for public bailouts. And yet for decades we thought that the people who were managing those firms were much smarter than we were.
We grew up admiring leaders such as Robert Rubin, John Thain, and Henry Paulson. Rubin, a former US Treasury Secretary and ex-Chairman of Goldman Sachs, presided over the collapse of Citigroup while taking home $150 million in bonuses. Should he really have been rewarded at all for his “performance”? Just this week, the technically bankrupt Citigroup’s senior executives were about to buy a new $50 million luxury French jet for themselves, until the White House stopped it.
Thain, also a former president of Goldman Sachs, helped himself and his Merrill Lynch staff to $4 billion in bonus payments even after he had to sell the firm to Bank of America to save it from bankruptcy. After he was caught spending $1.2 million, even as Merrill Lynch disintegrated, to decorate his new office, Bank of America had to fire him to placate growing revulsion over Wall Street’s out-of-control culture of entitlement.
Paulson, the outgoing Treasury Secretary and another Goldman Sachs veteran, left a loophole in his rescue package big enough for a truck to drive through. That loophole allowed his former friends and colleagues on Wall Street to pay themselves billion-dollar bonuses while keeping those firms afloat with taxpayers’ money.
The universities these men attended – Harvard and Yale for Rubin; MIT and Harvard for Thain; Dartmouth and Harvard for Paulson – have been magnets for the world’s finest young minds. The rest of us thought that these institutions could instill the wisdom, insight, and character of which we all wished we had more.
Perhaps parents all over the world should re-examine their often obsessive craving for these “name-brand” universities, pushing their children as if an Ivy League degree was an end in itself. Now we know that Wall Street’s titans were never all that smart, and certainly not very ethical, for they failed the only test that counts. All of the firms they led collapsed, and were saved only by money from those who could never get a senior job on Wall Street or a place at Harvard.
These Wall Street princes were smarter in one way, however: they managed to pocket a fortune while the rest of us are stuck with the mess they left behind. Bernard Madoff who hailed from down-market part of New York City and attended a middling university will spend time behind bars, but none of the titans of Wall Street with blue-chip pedigree will ever do so.
History has not been kind to societies that lose trust in the integrity of their leaders and institutions. We need to save our economic system from its abusers, or else.
Sin-ming Shaw is a private investor and former visiting scholar at Princeton University.
Copyright: Project Syndicate, 2009.
Obama should not just forgive and forget
By Sin-ming Shaw
In all the gin joints in all the towns in all the world filled with unemployed investment bankers and piano players, there is increasing talk about a rising stock market and the beginning of the next bull market starting 2010.
The bubble that had burst is already a distant memory. The pain of the bust has been accepted as a tolerable price for previous excesses. So why not just move on?
US President Barack Obama, striking a message of national unity and inclusiveness, seems to be on the same wavelength,
On a recent TV interview he said that "we need to look forward as opposed to looking backwards" when he was asked whether he would seek an investigation of all the wrongdoings, possibly even crimes, committed by various senior Bush appointees who had betrayed the nation's trust.
Even without a thorough investigation there already exists a substantial and substantiated body of misdeeds to keep the courts busy for years. They range from illegal hiring practices at important government agencies such as the Department of Justice based on political beliefs to uneven-handed granting of multi-million-dollar contracts on a no-bid basis in Iraq to companies that are political allies of the Bush administration.
However, the ability to forgive is one of the most admirable traits of human nature. We should not knock it.
But wait one second.
What if by ignoring the past we are only sowing the seeds for a repeat performance in the future? Wouldn't we be setting a precedent for our children that crime can and does pay? That loyalty to your boss is more important than obeying the law?
Let's take a quick tour down memory lane before we totally forget, let alone forgive. At the epicentre of the bubble that is still bursting was the systematic wrecking of governance built up over years to ensure the market was a level playing field.
Space forbids listing the wreckage. A good place to start is publicintegrity.org that has provided a partial list called "Our Broken Government".
Let me start with Alan Greenspan, once idolised by the financial world and a docile press who should have known better as a mystical god-like figure upon whose shoulders global finance rested. He is a devotee of Ayn Rand's philosophy who painted all governments as evil differentiated only by degree, not kind, that trampled on the creativity and the genius of the individual.
Last October, an angry US congressional committee demanded Mr Greenspan to fess up: "Do you feel that your ideology pushed you to make decisions that you wish you had not made?"
Mr Greenspan conceded: "Yes. Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief."
Mr Greenspan's ideology may have blind-sided him in his rarified world of economic theory, but many at the government frontline to ensure a level playing field for the public had completely abandoned their responsibility. They had taken to heart the cue from their leaders: the best government is least government.
There is much to that thinking. All too often, public officials behave as if they were masters, forgetting they are paid by the people to serve them. All too often they are as arrogant as they are incompetent. It is not difficult to paint public authorities as "hate" figures.
However, there is a difference between good and bad governance, between excessive and no regulation.
Imagine a football game without a referee enforcing universally accepted rules. Or if he simply leaves the match leaving the players to faithfully observe those rules because a "free market" solution is optimal?
Many of Mr Bush's appointees went about wrecking that referee part of the government with the presumption that regulations, per se, were "guilty" until proven otherwise. Often it was not out of ideology but also out of private interests lining their own pockets at the expense of the public.
The Federal Reserve Board and the Securities Exchange Commission (SEC) are the two principal guardians of the financial system. Mr Greenspan is at least contrite.
SEC under Mr Bush was notorious for looking the other way, especially when violators were significant financial backers of the Republican Party.
Enron was the single largest contributor to Mr Bush's 2000 presidential campaign and helped the new president draft legislation "regulating" the energy industry. Its then chairman, Ken Lay, once told the head of the regulatory board of the electricity industry to fall in line lest he risked losing his job. He refused to comply and lost his job. Mr Lay had stayed at the White House 11 times as Mr Bush's guest.
Harvey Pitt, the first SEC chairman appointed by Mr Bush was known for his coziness with the accounting profession. Major accounting firms had at times signed off on questionable financial statements of their major client companies. Enron was a classic case.
Mr Pitt left under an ignominious cloud of having taken his eyes off corporate malfeasance.
Mr Pitt's successor, William Donaldson, tried to rebuild the integrity of the SEC but had to beat a hasty retreat after serving only two years because the Republican-dominated SEC board joined up with powerful private sector interests to make his work impossible. SEC became toothless and the message to Wall Street was clear.
And then there is Christopher Cox who resigned on Jan 20, the day Mr Obama was sworn in as the 44th president of the United States. President Bush appointed him to head the SEC and praised him as "a champion of the free-enterprise system".
His championship is best illustrated by what happened on March 15 last year when Fed and Treasury officials were hammering out the terms of JP Morgan's takeover of Bear Stearns in an industry directly under SEC supervision. SEC staff desperately looking for Mr Cox to be involved found him at a private party. Mr Cox, like Mr Greenspan, believed a good regulator is one who regulates less and less.
Worse than "non-interference" in Wall Street shenanigans, Mr Cox ignored warning signals while the housing bubble was going off the chart. He never bothered to consider whether bond rating agencies were doing their job to provide accurate information to investors while highly leveraged credit based derivative products were being sold all over the world based on good ratings given to the underlying bonds.
CRAs charge debt issuers for rating them. "It would be like cattle ranchers paying the Department of Agriculture to rate the quality and safety of their beef," said one expert.
It was no surprise they totally "missed" the subprime meltdown. Recall, four days before Enron collapsed, CRAs maintained an "investment grade" of its bonds. Did they miss by incompetence or because they feared they might lose their clients?
This list hardly scratches the surface of mind-boggling government breakdowns under Bush because of his administration's deliberate anti-regulation mindset.
President Obama would be making his first major policy mistake if he were to forget and forgive. Eternal human greed will ensure rules will be broken unless punishment is a certain outcome of a crime.
Sin-ming Shaw is a former stock analyst for a Los Angeles-based fund management company.