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Stephen Foley
Stephen Foley is Associate Business Editor of The Independent, based in New York. In a decade at the paper, he has covered personal finance, the UK stock market and the pharmaceuticals industry, and been the Business section's share tipster. And since arriving with three suitcases in Manhattan in January 2006, he has witnessed and reported on a great economic boom turning spectacularly to bust. In March 2009, he was named Business and Finance Journalist of the Year at the British Press Awards.
The fact that Hank Greenberg is getting back a Persian rug and some photos of him meeting Chinese leaders, as part of his ceasefire with AIG, tells you all you need to know about the insurance industry's most pathetic feud.
Their legal settlement stipulates that AIG must no longer be "disparaging" of its former chief executive. So allow me.
The pettiness with which Mr Greenberg has pursued revenge on the insurer that ousted him in 2005 has irreparably tarnished his reputation. It was galling enough to watch AIG having to take him so seriously in the years before its collapse; since the insurer was nationalised in last year's financial panic, his continued haunting of the company has been beyond the pale. Infuriatingly, AIG is going to pick up Mr Greenberg's $150m legal bill, using money which by rights should be diverted to the US taxpayer, to which AIG is in hock to the tune of $180bn.
At 84, Mr Greenberg is super-humanly fit and as competitive as ever. He plays tennis, lifts weights and speaks in military metaphors, as befits someone whose own service included taking part in the D-Day landings. He ran AIG as a dictatorship. Such aggression can take you so far – very far, he proves – but it can also unhinge you.
There's no quibbling with Mr Greenberg's mammoth achievement in 45 years, turning AIG from an unknown Asia-focused insurer into the largest on the planet. I understand, too, why some people feel he was hard done by when, at the height of Eliot Spitzer's campaign against Wall Street, he was forced out amid a $2bn accounting scandal for which he was ultimately never charged with criminal wrongdoing. He did pay $15m this year to settle the remaining minor civil case with the Securities and Exchange Commission, though, and did so with his usual bad grace, arguing most of the accounting restatements had been unnecessary.
Mr Greenberg's campaign of revenge against the board that voted to oust him, his public rubbishing of his successor, Martin Sullivan (who he anointed), and his legal campaign for compensation were unbecoming of the insurance industry's elder statesman.
The two sides fought over the ownership of boardroom trinkets, such as the rug and artworks. He sued when the share price went down, claiming management misled him. There were tit-for-tat suits over the ownership of $4.3bn in AIG shares. To call him a "distraction" isn't the half of it.
While AIG's credit derivatives insurance business was spinning out of control, managers had to spend time and money dealing with Mr Greenberg's interventions. He repeatedly signalled to journalists that he would launch a shareholder vote to take back control of the company, but never did. Ludicrously, at the height of last year's panic, when AIG was already done for and negotiating its government bailout, he emailed the company to suggest he buy it.
Mr Greenberg has behaved since last year as if the collapse of AIG is vindication for him, proving he shouldn't have been let go. I can't count the times that I have heard investors, analysts and writers assert that the firm would be a picture of health today under his continued leadership and before Congress this spring, he claimed he would never have allowed the financial products group to swell to such a size.
There's no way to know, of course, but I am sceptical. In three years of whingeing about the management of AIG after his ouster, I can't find any sign of Mr Greenberg having raised that particular alarm. He never hedged any of those toxic credit default swap positions when he was at the helm, what's to make us think he would have started? When in the spring he was warning of a "crisis" at the company, he spent as much time talking about the management of the general insurance businesses he knows best.
No doubt this week's settlement has been possible because Bob Benmosche, AIG's latest chief executive and an aggressive character in the Greenberg mould, has been better at massaging the billionaire's enormous ego. It is undoubtedly the right thing to have done, but it leaves a horrible taste in the mouth all the same.
Their legal settlement stipulates that AIG must no longer be "disparaging" of its former chief executive. So allow me.
The pettiness with which Mr Greenberg has pursued revenge on the insurer that ousted him in 2005 has irreparably tarnished his reputation. It was galling enough to watch AIG having to take him so seriously in the years before its collapse; since the insurer was nationalised in last year's financial panic, his continued haunting of the company has been beyond the pale. Infuriatingly, AIG is going to pick up Mr Greenberg's $150m legal bill, using money which by rights should be diverted to the US taxpayer, to which AIG is in hock to the tune of $180bn.
At 84, Mr Greenberg is super-humanly fit and as competitive as ever. He plays tennis, lifts weights and speaks in military metaphors, as befits someone whose own service included taking part in the D-Day landings. He ran AIG as a dictatorship. Such aggression can take you so far – very far, he proves – but it can also unhinge you.
There's no quibbling with Mr Greenberg's mammoth achievement in 45 years, turning AIG from an unknown Asia-focused insurer into the largest on the planet. I understand, too, why some people feel he was hard done by when, at the height of Eliot Spitzer's campaign against Wall Street, he was forced out amid a $2bn accounting scandal for which he was ultimately never charged with criminal wrongdoing. He did pay $15m this year to settle the remaining minor civil case with the Securities and Exchange Commission, though, and did so with his usual bad grace, arguing most of the accounting restatements had been unnecessary.
Mr Greenberg's campaign of revenge against the board that voted to oust him, his public rubbishing of his successor, Martin Sullivan (who he anointed), and his legal campaign for compensation were unbecoming of the insurance industry's elder statesman.
The two sides fought over the ownership of boardroom trinkets, such as the rug and artworks. He sued when the share price went down, claiming management misled him. There were tit-for-tat suits over the ownership of $4.3bn in AIG shares. To call him a "distraction" isn't the half of it.
While AIG's credit derivatives insurance business was spinning out of control, managers had to spend time and money dealing with Mr Greenberg's interventions. He repeatedly signalled to journalists that he would launch a shareholder vote to take back control of the company, but never did. Ludicrously, at the height of last year's panic, when AIG was already done for and negotiating its government bailout, he emailed the company to suggest he buy it.
Mr Greenberg has behaved since last year as if the collapse of AIG is vindication for him, proving he shouldn't have been let go. I can't count the times that I have heard investors, analysts and writers assert that the firm would be a picture of health today under his continued leadership and before Congress this spring, he claimed he would never have allowed the financial products group to swell to such a size.
There's no way to know, of course, but I am sceptical. In three years of whingeing about the management of AIG after his ouster, I can't find any sign of Mr Greenberg having raised that particular alarm. He never hedged any of those toxic credit default swap positions when he was at the helm, what's to make us think he would have started? When in the spring he was warning of a "crisis" at the company, he spent as much time talking about the management of the general insurance businesses he knows best.
No doubt this week's settlement has been possible because Bob Benmosche, AIG's latest chief executive and an aggressive character in the Greenberg mould, has been better at massaging the billionaire's enormous ego. It is undoubtedly the right thing to have done, but it leaves a horrible taste in the mouth all the same.
If you are the head of a retail chain in the US, you'll have been talking for months now about the continuing cautious state of the consumer, the prudent approach you are taking to planning for the holiday season and your limited expectations for the coming, critical weeks of trading. Don't be fooled.
Below the surface, there is genuine optimism, and the anecdotal evidence from yesterday's "Black Friday" festival of consumerism is that the US shopper is indeed no longer a drag on the economy.
Last year's holiday season was the worst in the shops for 40 years, as consumers feared for their jobs and their savings at a time when it still looked as if the financial system could fail again. This time out, US retailers have been putting more money into advertising, and doing so further in advance of the season.
The discounts on offer this Black Friday – the day after Thanksgiving when people traditionally hit the shops and which supposedly marks the point when retailers go into the black for the year – were smaller and more carefully targeted than the desperate price cuts of a year ago. To the extent that these things can be gauged, the crowds at malls and superstores were noticeably bigger yesterday than Black Friday 2008.
Because of the uncertain jobs market and the reduced availability of – and desire for – credit, households are rebuilding their savings. But after a year of relative frugality, it seems worth betting that there is pent-up demand for luxuries such as a new computer or television, and for restocking depleted wardrobes. A savings pause seems likely. After all, 'tis the season.
Below the surface, there is genuine optimism, and the anecdotal evidence from yesterday's "Black Friday" festival of consumerism is that the US shopper is indeed no longer a drag on the economy.
Last year's holiday season was the worst in the shops for 40 years, as consumers feared for their jobs and their savings at a time when it still looked as if the financial system could fail again. This time out, US retailers have been putting more money into advertising, and doing so further in advance of the season.
The discounts on offer this Black Friday – the day after Thanksgiving when people traditionally hit the shops and which supposedly marks the point when retailers go into the black for the year – were smaller and more carefully targeted than the desperate price cuts of a year ago. To the extent that these things can be gauged, the crowds at malls and superstores were noticeably bigger yesterday than Black Friday 2008.
Because of the uncertain jobs market and the reduced availability of – and desire for – credit, households are rebuilding their savings. But after a year of relative frugality, it seems worth betting that there is pent-up demand for luxuries such as a new computer or television, and for restocking depleted wardrobes. A savings pause seems likely. After all, 'tis the season.
If you wanted to read about Oprah Winfrey quitting her chat show, or Michelle Obama’s wardrobe, you could go to AOL’s website. But of course you don't have to. There’s lots of coverage of Oprah out there on the web. And if you were after something more entertaining by half, you might watch a Barack and Michelle elf dance on YouTube.
There is way too much internet.
To put it another way, there are more people and corporations creating ever more content for the web than can possibly make a living from ads placed alongside the material being uploaded. It is an inauspicious time to be ramping up one’s journalism on the internet, yet that is precisely what AOL is doing.
It has been boxed into this. The other half of its business is demonstrably and imminently doomed. Its dial-up internet service provider operations put America Online in the Nineties, but in an era of broadband its paid subscription model is an anachronism. It is withering.
Now AOL is relying more heavily on attracting readers to its news and entertainment sites. Trouble is, it provides neither the high-quality content of newspaper and broadcaster websites, nor the belly laughs or vibrancy of user-generated content. Visitor numbers are down 11 per cent year-on-year; it is laying off 2,500 people, a third of its staff.
AOL’s websites could disappear tomorrow and no one would be in the slightest bit disadvantaged or upset. I can’t think of a better definition of value-less. The company is being spun off from Time Warner, but this is no flotation. More likely, it will sink like a stone.
There is a conflagration coming that will wipe a lot of professional content providers from the web. AOL is one of the nearest to the flames.
There is way too much internet.
To put it another way, there are more people and corporations creating ever more content for the web than can possibly make a living from ads placed alongside the material being uploaded. It is an inauspicious time to be ramping up one’s journalism on the internet, yet that is precisely what AOL is doing.
It has been boxed into this. The other half of its business is demonstrably and imminently doomed. Its dial-up internet service provider operations put America Online in the Nineties, but in an era of broadband its paid subscription model is an anachronism. It is withering.
Now AOL is relying more heavily on attracting readers to its news and entertainment sites. Trouble is, it provides neither the high-quality content of newspaper and broadcaster websites, nor the belly laughs or vibrancy of user-generated content. Visitor numbers are down 11 per cent year-on-year; it is laying off 2,500 people, a third of its staff.
AOL’s websites could disappear tomorrow and no one would be in the slightest bit disadvantaged or upset. I can’t think of a better definition of value-less. The company is being spun off from Time Warner, but this is no flotation. More likely, it will sink like a stone.
There is a conflagration coming that will wipe a lot of professional content providers from the web. AOL is one of the nearest to the flames.
Elizabeth Warren does a disservice to herself and to Congress when she misrepresents her own report into the Wall Street bailout. The Harvard professor heads the Congressional Oversight Panel – not coincidentally abbreviated to COP – monitoring the bailout, and she popped up all over the place yesterday to highlight the panel's latest work on the financial guarantees that the Fed and the US Treasury gave last year. These included promises to backstop money market funds, to cover losses on some banks' loans, and to insure new debt issued by financial institutions.
Obviously there are eye-popping numbers involved. At the height of the panic, the US government was "on the hook" for up to $4.5 trillion, Professor Warren incanted in her media appearances. And in the tut-tutting manner of someone who has just discovered the source of a bad smell, she talked about moral hazard, without pointing out her panel has suggested precisely nothing that can be done about that.
The real meat in the report is its totting up of the fees the US taxpayer has earned from those guarantees. Any bank that sold debt with taxpayer default insurance had to pay for the privilege, which rather takes the edge off the moral hazard argument. Some $17.4bn has come into the coffers and, so far, only $2m has been lost. Only the insurance of Citigroup's toxic loans threaten to swell that figure, with perhaps $4bn being lost under a really dire economic scenario.
The problem is that one doesn't get on telly by praising the government for saving the financial system and making money to boot. Professor Warren's schoolma'am soundbites and chat-show charm gave her a powerful role in explaining and challenging the bailout. But where initially she elevated the public debate, now she seems intent on dumbing it down.
The unsung heroes of Ford's return to profitability this week are the men and women of the carmaker's finance department.
It is three years this month since they mortgaged almost all of the company's assets – from assembly plants to the intellectual property behind the iconic blue oval logo – and began to hunker down for a recession. Good timing, not unrelated to the arrival at the company of Alan Mulally, ex of Boeing, the first chief executive to come from outside the clubby and emotional auto industry.
The finance department's sharp moves have included buying back Ford bonds, when they were trading at depressed levels, and issuing new shares to investors when that was the cheapest way to fund a new workers' healthcare trust.
In raising absolutely as much as the debt and equity markets would allow, whenever a brief window opened, the company managed to avoid the fate of its Detroit rivals. And while General Motors and Chrysler made a pitstop in bankruptcy court to fill up on taxpayer cash, Ford was able to steal market share from them.
But there is time only for a quick toot on the horn in appreciation. Unsupported by bailout money, Ford now has higher debts than its peers and its financiers have already had to turn their attentions to rearranging its debt repayment schedule. They are pros. They'll keep Ford on the road.
There is both beauty and beastliness in round numbers. The US unemployment rate has been marching determinedly upwards for two years, but the fact of its passing 10 per cent is no less startling for that. That it has happened a month or two earlier than most forecasters predicted only added to the breathlessness of the headlines.
But round numbers tempt us to overestimate their significance. Like Dow 10,000 – the stock market bar that journalists describe, deliberately vaguely, as "psychologically important" – the difference between 9.8 per cent in September and 10.2 per cent in October is not actually that significant.
For the family on food stamps, or the freelancer who has been without a project for months, or the assembly line worker hearing rumours of lay-offs, it is not the number in the newspaper that is driving their decisions about how much to spend and how much to save this Christmas. It's a grim economy out there. Tell us something we don't already know.
It has always been unreasonable to assume that the US consumer, burdened by debt, anxious of their employment prospects and traumatised by the collapse in the value of their houses and pensions, would be the motor that brings us out of recession.
Re-employment always lags the economic rebound, as businesses squeeze as much extra juice as possible out of their existing workers. Little wonder productivity gains in the third quarter were four times the historic average. If anyone had thought the snap-back in employment would be quicker this time, perhaps because the lay-offs had been so swift in the first place, yesterday's numbers dashed that hope.
There were a few good signs buried underneath the headline gloom, though. The number of temporary workers rose, indicating that employers are in need of more hands, even if they are not willing to hire full time. The average weekly wage rose.
And there were reasons to be cautious about that large jump in the unemployment rate. It comes from a phone survey of households, and has a higher margin of error than the survey of employers that gives us the actual payroll numbers. According to that more statistically robust report, the US economy shed 190,000 jobs last month, still on an improving trend. Taken together with the upward revisions to the September figure, that puts the number of jobs in the economy exactly in line with forecasts.
Employers make investment decisions based on their own, on-the-ground business experience, not on round numbers. Third-quarter earnings beat expectations at more than three-quarters of the companies in the S&P 500, freeing up money to start the process of rehiring in the near future. The broad outlines of a recovery – a stuttering, shallow recovery, but a recovery none the less – remain in place.
If there is one thing that is definitely too big to fail, it is the US Treasury's plans for Wall Street reform. So it was dispiriting that the Obama administration has put forward a proposal with a hole in its heart.
The proposed legislation published this week creates a "third way" for dealing with collapsing companies, so that regulators and politicians are never again faced with the choices of last year, between allowing an uncontrolled bankruptcy (à la Lehman Brothers) or a taxpayer-funded bailout (à la AIG). But the Treasury has botched the central, and the most politically charged, issue – namely, how to pay for it.
This third way is a "resolution authority", overseen by a council of regulators, that allows the unwinding of a failed firm in an orderly fashion. It's a bigger version of the system for seizing retail banks, which is proving invaluable this year. The Federal Deposit Insurance Corporation (FDIC) has seized more than 100 US banks, transferred their good assets to new owners and absorbed losses on the bad assets, all without causing a ripple.
The resolution authority will cover all financial companies deemed too-big-to-fail-in-an-uncontrolled-fashi
So far, so consensus. The trouble is that winding down a firm takes money. Even your common or garden industrial bankruptcy usually involves some debtor-in-possession financing, so that the company can keep paying its employees while it restructures. For failing financial firms, deeply intertwined with their peers, the cost of meeting counterparty obligations could quickly run into the billions. This is no small matter to leave unresolved.
Under the Obama plan, the money would come initially from the public purse and be recouped later by a levy on the other companies in the too-big-to-fail category, the "survivors", if you like. Sheila Bair, who heads the FDIC, says it would be better to get all the institutions to pay up front into an insurance fund, the same way the retail banks do. The stubborn Ms Bair once again finds herself taking a harsher tone with Wall Street and on a collision course with the Treasury. Once again, she is right.
It hardly seems fair that the one firm that escapes having to pay into the scheme is the one firm that triggers its use, but that is the least of the problems with an unfunded resolution authority.
The collapse of a systemically important financial firm is hardly likely to be happening in isolation. More likely, it will be in the context of some wider economic calamity or capital market seizure that affects many of its healthier peers, too. The "survivor pays" model implies that these other firms will be tapped for money just when they are trying to rebuild their own balance sheets. They may be survivors, but they are also likely to be walking wounded.
The threat of an onerous levy at that sensitive time could weaken the system further. And these firms' lobbyists might find a sympathetic ear if they ask to be let off the hook – which would mean taxpayers being back on the hook, exactly the outcome everyone is trying to avoid.
A pre-funded scheme also has one wonderful advantage in the present climate. As Wall Street returns to health, it can be presented as a tax on those newly-minted profits, and a means of reducing bonuses.
Tim Geithner, the Treasury Secretary, had a pretty unconvincing answer when lawmakers pressed him on Capitol Hill. A pre-funded scheme, he said, would create "an expectation of explicit insurance" that encourages risky behaviour. Come on, Tim. The US government just spent $700bn bailing out the financial system. That's an expectation that already exists.
It is a mystery why the administration is so adamant against a pre-funded scheme. One can only assume that the Wall Street lobbyists have nobbled it. Why else would the Treasury have a tin ear to the politics of this, to such an extent that it is endangering the whole vital project?
The proposed legislation published this week creates a "third way" for dealing with collapsing companies, so that regulators and politicians are never again faced with the choices of last year, between allowing an uncontrolled bankruptcy (à la Lehman Brothers) or a taxpayer-funded bailout (à la AIG). But the Treasury has botched the central, and the most politically charged, issue – namely, how to pay for it.
This third way is a "resolution authority", overseen by a council of regulators, that allows the unwinding of a failed firm in an orderly fashion. It's a bigger version of the system for seizing retail banks, which is proving invaluable this year. The Federal Deposit Insurance Corporation (FDIC) has seized more than 100 US banks, transferred their good assets to new owners and absorbed losses on the bad assets, all without causing a ripple.
The resolution authority will cover all financial companies deemed too-big-to-fail-in-an-uncontrolled-fashi
So far, so consensus. The trouble is that winding down a firm takes money. Even your common or garden industrial bankruptcy usually involves some debtor-in-possession financing, so that the company can keep paying its employees while it restructures. For failing financial firms, deeply intertwined with their peers, the cost of meeting counterparty obligations could quickly run into the billions. This is no small matter to leave unresolved.
Under the Obama plan, the money would come initially from the public purse and be recouped later by a levy on the other companies in the too-big-to-fail category, the "survivors", if you like. Sheila Bair, who heads the FDIC, says it would be better to get all the institutions to pay up front into an insurance fund, the same way the retail banks do. The stubborn Ms Bair once again finds herself taking a harsher tone with Wall Street and on a collision course with the Treasury. Once again, she is right.
It hardly seems fair that the one firm that escapes having to pay into the scheme is the one firm that triggers its use, but that is the least of the problems with an unfunded resolution authority.
The collapse of a systemically important financial firm is hardly likely to be happening in isolation. More likely, it will be in the context of some wider economic calamity or capital market seizure that affects many of its healthier peers, too. The "survivor pays" model implies that these other firms will be tapped for money just when they are trying to rebuild their own balance sheets. They may be survivors, but they are also likely to be walking wounded.
The threat of an onerous levy at that sensitive time could weaken the system further. And these firms' lobbyists might find a sympathetic ear if they ask to be let off the hook – which would mean taxpayers being back on the hook, exactly the outcome everyone is trying to avoid.
A pre-funded scheme also has one wonderful advantage in the present climate. As Wall Street returns to health, it can be presented as a tax on those newly-minted profits, and a means of reducing bonuses.
Tim Geithner, the Treasury Secretary, had a pretty unconvincing answer when lawmakers pressed him on Capitol Hill. A pre-funded scheme, he said, would create "an expectation of explicit insurance" that encourages risky behaviour. Come on, Tim. The US government just spent $700bn bailing out the financial system. That's an expectation that already exists.
It is a mystery why the administration is so adamant against a pre-funded scheme. One can only assume that the Wall Street lobbyists have nobbled it. Why else would the Treasury have a tin ear to the politics of this, to such an extent that it is endangering the whole vital project?
There is something more than a little fishy about the $87.4m (£53m) fine levied on BP by the US Occupational Safety and Health Authority, over alleged failings at its troubled Texas City oil refinery.
The deaths of 15 people at the plant in March 2005 was BP's blackest day, and – along with an environmentally catastrophic oil spill in Alaska around the same time – revealed that the company's shiny green image was more marketing trick than real corporate policy.
But four years after signing up to a list of safety improvements at the plant, and accepting a first OSHA fine of $21.3m it has been diligently working to instill a better safety culture, and has been funding upgrade work along the lines agreed with the regulator. It is work that has won support from the unions, whose criticisms of shoddy management and underinvestment were ignored before the blast.
It was only late last year that it started to appear as if BP and its regulator disagreed over the timing of the improvement works – a moment that coincided with a change of leadership in Washington. Regulators, whose senior staff are all political appointees, are acutely sensitive to these political winds. In that context, the desire for headline-grabbing fines is not unnatural. But given BP's good faith, this is a case where there should have been plenty of opportunity for compromise.
The oil giant has every right to feel hard done by, when one apparently agreed timetable is ripped up in favour of a tighter one, and it is then fined four times as much for the supposed delay as it was for the egregious safety lapses that caused the deaths of so many.
The deaths of 15 people at the plant in March 2005 was BP's blackest day, and – along with an environmentally catastrophic oil spill in Alaska around the same time – revealed that the company's shiny green image was more marketing trick than real corporate policy.
But four years after signing up to a list of safety improvements at the plant, and accepting a first OSHA fine of $21.3m it has been diligently working to instill a better safety culture, and has been funding upgrade work along the lines agreed with the regulator. It is work that has won support from the unions, whose criticisms of shoddy management and underinvestment were ignored before the blast.
It was only late last year that it started to appear as if BP and its regulator disagreed over the timing of the improvement works – a moment that coincided with a change of leadership in Washington. Regulators, whose senior staff are all political appointees, are acutely sensitive to these political winds. In that context, the desire for headline-grabbing fines is not unnatural. But given BP's good faith, this is a case where there should have been plenty of opportunity for compromise.
The oil giant has every right to feel hard done by, when one apparently agreed timetable is ripped up in favour of a tighter one, and it is then fined four times as much for the supposed delay as it was for the egregious safety lapses that caused the deaths of so many.
The public is a mad dog, throwing itself against a wall. Rage against bankers and their outsize bonuses, far from diminishing with distance from the crash, is becoming more intense, now that the Wall Street train is back on the rails with barely a drop of gravy being spilled. The popular fury is fuelled by an acute sense of our own impotence. But what if this rage is not really about bankers at all?
The burning sense of injustice that underlies the present anger has its roots not in the calamities wrought by Wall Street last year, but more deeply. It has been forged over time, through waves of revulsion at fat-cat pay and hedge-fund greed. To find a balm, we need to confront the vast disparities of income that have been allowed to open up in our society.
It is a subject which has gained surprisingly little currency despite the centrality of income inequality, not just to the realisation of injustice now, but also to the economic causes of the credit crisis and recession.
Tell me if this is a coincidence. The income of the top 10 per cent of earners in the US has accounted for about 50 per cent of the total on only two occasions in the past 100 years, first in 1928 and then again in 2006-7. The two great crashes of the past century occurred the following years.
Thanks to the award-winning work of economists Emmanuel Saez and Thomas Piketty, we can trace income inequality over more than a century and see that, after flatlining for decades after the Second World War, it began relentlessly rising with the birth of the Reagan revolution in the US, and its intellectual twin, Thatcherism. Devil-may-care capitalism sent chief executive pay at the biggest US companies – not just in finance – to 275 times the average of their staff in 2007. It was a tenth of that in the mid-1960s. We may have been doomed to the present disaster for some time. J K Galbraith, in his definitive work The Great Crash, 1929, identified "the bad distribution of income" as one of five contributory factors to the stock-market plunge and subsequent Great Depression. With more money than they know what to do with, the super-rich spend on luxuries and speculative investments only to pull them back sharply when exuberance is exhausted and fear threatens to take over. This sort of economy is more volatile than one which is more broadly based.
And something else: the economics of envy. To the greed of the few, add the jealousy of the many, and the fear of being left behind. Those toxic "liar loans" and "ninja mortgages" were not, in the main, foisted on unsuspecting naïfs. They were grabbed for gladly by people who knew they were taking a risk for their extra holiday, for the extension they built to match their neighbours – or for that move to a leafier suburb to keep their kids out of a sink school.
Reversing the problem of rising inequality requires more than bashing banks. Governments shouldn't dictate pay levels in any particular sector of the economy, in any case. How, practically, could we? We agree bankers should be paid according to their performance, which means according to their profits (as measured over a cycle, we would now add). And banks' profits are what they are: the sum of thousands of transactions, often advice paid for by a client, or trades voluntarily entered into by other market players. Which particular activities do we want to deprofitise, and how?
Drag someone away from the angry soundbite and the problem is, suddenly, obviously intractable. Which is why none of the reform plans on the table – between the British government and the banks operating in the City of London, for example, or the G20 nations, or even the Federal Reserve's strictures this week – have anything to say about the level of pay, only about its structure.
None of this is to say that Wall Street doesn't need root and branch restructuring. Of course it does. And if regulators do their job, profits should moderate overall, as banks are prevented from juicing their returns with risk-taking on borrowed money. Shareholders should be the ones to set pay levels, and they should be roused from their behinds to do so. The only really legitimate tool that a government can wield on behalf of taxpayers is the tax system itself, and this it should wield without discriminating against employees of a particular profession.
Tackling the moral and economic problem of inequality implies an across-the-board approach. And it is an opportune moment to debate higher taxes on the highest incomes. Paying back skyrocketing government debt will require that those best able start to pay a fairer share.
Of course, I'm being naïve to suggest that debating redestributive taxes will be a civilised affair, particularly in this gutturally anti-tax nation. But are we getting anywhere otherwise?
For now, the Obama administration halves executive pay at the bailed-out companies still under its influence, only to expose how few people and how few companies it can touch (700 at seven). Admonishments on pay keep coming from politicians and central bankers on both sides of the Atlantic, but record bonuses keep coming, too, and so do the bumper payouts for top executives in other industries.
How much healthier it would be to tax these salaries and bonuses fairly, instead of railing against our inability to prevent them from being awarded in the first place. Maybe that way we can start to create an economy at ease with itself.
The burning sense of injustice that underlies the present anger has its roots not in the calamities wrought by Wall Street last year, but more deeply. It has been forged over time, through waves of revulsion at fat-cat pay and hedge-fund greed. To find a balm, we need to confront the vast disparities of income that have been allowed to open up in our society.
It is a subject which has gained surprisingly little currency despite the centrality of income inequality, not just to the realisation of injustice now, but also to the economic causes of the credit crisis and recession.
Tell me if this is a coincidence. The income of the top 10 per cent of earners in the US has accounted for about 50 per cent of the total on only two occasions in the past 100 years, first in 1928 and then again in 2006-7. The two great crashes of the past century occurred the following years.
Thanks to the award-winning work of economists Emmanuel Saez and Thomas Piketty, we can trace income inequality over more than a century and see that, after flatlining for decades after the Second World War, it began relentlessly rising with the birth of the Reagan revolution in the US, and its intellectual twin, Thatcherism. Devil-may-care capitalism sent chief executive pay at the biggest US companies – not just in finance – to 275 times the average of their staff in 2007. It was a tenth of that in the mid-1960s. We may have been doomed to the present disaster for some time. J K Galbraith, in his definitive work The Great Crash, 1929, identified "the bad distribution of income" as one of five contributory factors to the stock-market plunge and subsequent Great Depression. With more money than they know what to do with, the super-rich spend on luxuries and speculative investments only to pull them back sharply when exuberance is exhausted and fear threatens to take over. This sort of economy is more volatile than one which is more broadly based.
And something else: the economics of envy. To the greed of the few, add the jealousy of the many, and the fear of being left behind. Those toxic "liar loans" and "ninja mortgages" were not, in the main, foisted on unsuspecting naïfs. They were grabbed for gladly by people who knew they were taking a risk for their extra holiday, for the extension they built to match their neighbours – or for that move to a leafier suburb to keep their kids out of a sink school.
Reversing the problem of rising inequality requires more than bashing banks. Governments shouldn't dictate pay levels in any particular sector of the economy, in any case. How, practically, could we? We agree bankers should be paid according to their performance, which means according to their profits (as measured over a cycle, we would now add). And banks' profits are what they are: the sum of thousands of transactions, often advice paid for by a client, or trades voluntarily entered into by other market players. Which particular activities do we want to deprofitise, and how?
Drag someone away from the angry soundbite and the problem is, suddenly, obviously intractable. Which is why none of the reform plans on the table – between the British government and the banks operating in the City of London, for example, or the G20 nations, or even the Federal Reserve's strictures this week – have anything to say about the level of pay, only about its structure.
None of this is to say that Wall Street doesn't need root and branch restructuring. Of course it does. And if regulators do their job, profits should moderate overall, as banks are prevented from juicing their returns with risk-taking on borrowed money. Shareholders should be the ones to set pay levels, and they should be roused from their behinds to do so. The only really legitimate tool that a government can wield on behalf of taxpayers is the tax system itself, and this it should wield without discriminating against employees of a particular profession.
Tackling the moral and economic problem of inequality implies an across-the-board approach. And it is an opportune moment to debate higher taxes on the highest incomes. Paying back skyrocketing government debt will require that those best able start to pay a fairer share.
Of course, I'm being naïve to suggest that debating redestributive taxes will be a civilised affair, particularly in this gutturally anti-tax nation. But are we getting anywhere otherwise?
For now, the Obama administration halves executive pay at the bailed-out companies still under its influence, only to expose how few people and how few companies it can touch (700 at seven). Admonishments on pay keep coming from politicians and central bankers on both sides of the Atlantic, but record bonuses keep coming, too, and so do the bumper payouts for top executives in other industries.
How much healthier it would be to tax these salaries and bonuses fairly, instead of railing against our inability to prevent them from being awarded in the first place. Maybe that way we can start to create an economy at ease with itself.
So Ticketmaster, that dreadful pickpocket who preys on concertgoers everywhere, is scrambling to save its $1.3bn merger with Live Nation, the giant concert promoter. It should stop trying. It is time to give up on an outrageous, monopolistic deal that should never have been contemplated in the first place.
Fresh from having the merger blocked by the UK's Competition Commission earlier this month, the two sides have now been told they must make major concessions if they want to avoid the same fate in their much more important home market.
Ticketmaster is the dominant concert ticket retailer, and it also owns Front Line Management, one of the most powerful artist management groups in the world. Live Nation is the world's largest concert promoter and the owner of 140 major venues, and has been dabbling in artist management deals of its own. For starters, it signed what it calls "360 degree" deals with stars including Jay-Z and Madonna, to promote merchandising and even digital music on their behalf.
Like the consumers who have to pay surcharge on top of surcharge to buy through Ticketmaster, Live Nation had gotten fed up with the fees charged to concert venues and artists whose tickets it sold, so it set up its own rival online service. That would be snuffed out by this deal, eliminating any hope it might bring down ticket costs.
Indeed, the deal is explicitly about raising ticket prices, since both sides say it would make it easier to arrange auctions of tickets for sell-out concerts. I'm sympathetic to the need for artists to make more from live shows, now music is free to anyone with file-sharing software. But I see no reason why prices can't be raised to market levels unilaterally by performers and their promoters, without creating a vertically integrated industry behemoth riven with conflicts of interest.
What Irving Azoff, the Front Line founder who runs Ticketmaster, and Michael Rapino at Live Nation plan is a straightforward land grab in the anarchy that has followed the collapse of the record labels' empires. Their merger could roll back some of the dynamism seen in the music industry, as emerging stars are frozen out of concert venues in favour of artists managed in-house. Other problems are legion. Independent concert promoters could find themselves second-class citizens on the centralised ticketing platform. The merger proposes just the sort of vertical integration that the Obama administration has promised to scrutinise more closely.
Fresh from having the merger blocked by the UK's Competition Commission earlier this month, the two sides have now been told they must make major concessions if they want to avoid the same fate in their much more important home market.
Ticketmaster is the dominant concert ticket retailer, and it also owns Front Line Management, one of the most powerful artist management groups in the world. Live Nation is the world's largest concert promoter and the owner of 140 major venues, and has been dabbling in artist management deals of its own. For starters, it signed what it calls "360 degree" deals with stars including Jay-Z and Madonna, to promote merchandising and even digital music on their behalf.
Like the consumers who have to pay surcharge on top of surcharge to buy through Ticketmaster, Live Nation had gotten fed up with the fees charged to concert venues and artists whose tickets it sold, so it set up its own rival online service. That would be snuffed out by this deal, eliminating any hope it might bring down ticket costs.
Indeed, the deal is explicitly about raising ticket prices, since both sides say it would make it easier to arrange auctions of tickets for sell-out concerts. I'm sympathetic to the need for artists to make more from live shows, now music is free to anyone with file-sharing software. But I see no reason why prices can't be raised to market levels unilaterally by performers and their promoters, without creating a vertically integrated industry behemoth riven with conflicts of interest.
What Irving Azoff, the Front Line founder who runs Ticketmaster, and Michael Rapino at Live Nation plan is a straightforward land grab in the anarchy that has followed the collapse of the record labels' empires. Their merger could roll back some of the dynamism seen in the music industry, as emerging stars are frozen out of concert venues in favour of artists managed in-house. Other problems are legion. Independent concert promoters could find themselves second-class citizens on the centralised ticketing platform. The merger proposes just the sort of vertical integration that the Obama administration has promised to scrutinise more closely.
The US Justice Department is undoubtedly taking into account the outpouring of opposition from independent concert promoters, artists and a concert-going public that, frankly, wants Ticketmaster to face an investigation for the price gouging it already conducts as a standalone company. One last heave ought to be enough to kill this deal.
Whether you choose the formal Special Master for Compensation, or the shorthand "Pay Tsar", Ken Feinberg's title reeks of authoritarian power. The Washington lawyer, appointed to dictate remuneration at America's taxpayer-owned banks, car companies and insurers, is showing that he is determined to use it.
I have been struggling to get comfortable with Mr Feinberg's order to zero out the 2009 pay of Ken Lewis, the humiliated and soon-to-depart boss of Bank of America. Of course Mr Lewis wasn't going to put up a fight. The $1.5m salary is irrelevant to his already comfortable retirement, and he has suffered far too much public opprobrium already.
But what principles is Mr Feinberg operating on? He has promised to set them out publicly soon, but I am not optimistic they will be coherent, or even fair. I dislike their retroactive nature, and am nervous about ripping up contract law.
The only way to see this is as an exercise in raw power. I'm a US taxpayer, so $1.5m less for Ken Lewis is $1.5m more we might get back of the bailout funds. It is a model that shareholders might want to follow for future pay rounds: private-sector pay tsars, appointed to represent investors, who would sit on remuneration committees and talk down the awards – before they are written into contracts.
I have been struggling to get comfortable with Mr Feinberg's order to zero out the 2009 pay of Ken Lewis, the humiliated and soon-to-depart boss of Bank of America. Of course Mr Lewis wasn't going to put up a fight. The $1.5m salary is irrelevant to his already comfortable retirement, and he has suffered far too much public opprobrium already.
But what principles is Mr Feinberg operating on? He has promised to set them out publicly soon, but I am not optimistic they will be coherent, or even fair. I dislike their retroactive nature, and am nervous about ripping up contract law.
The only way to see this is as an exercise in raw power. I'm a US taxpayer, so $1.5m less for Ken Lewis is $1.5m more we might get back of the bailout funds. It is a model that shareholders might want to follow for future pay rounds: private-sector pay tsars, appointed to represent investors, who would sit on remuneration committees and talk down the awards – before they are written into contracts.
If there is a corporate metaphor for our intoxication with finance over the credit boom years, than General Electric is it. What started out as a small financial services division offering credit to homeowners who wanted to buy its appliances swelled and swelled until it was generating more than half the company's profits in 2007.
Obviously, it plunged to huge losses last year, on sub-prime mortgage lending, but results yesterday reveal that it is further from a return to health than many had hoped.
Jeff Immelt, GE chief executive, said he was shrinking the business quickly back down to size, but there should be more urgency, if not for GE's shareholders then for the financial system as a whole. GE Capital is just the sort of "too big to fail" institution that shouldn't be allowed to exist outside of a heavily regulated bank, yet GE's efforts at the moment are concentrated on (successfully) lobbying to fend off quick implementation of the new financial sector reforms, which could have forced it to immediately recapitalise and probably divest the division.
GE Capital was again the weak spot of quarterly earnings yesterday, and the company admitted that its commercial real estate investments were tacking close to the most adverse scenario imagined under the US government's "stress test". Its insistence that the business does not need to be recapitalised – with big dilution to GE shareholders – looked even more hollow last night than it did before. It certainly will need to be when the financial reforms are enacted and newly empowered regulators sweep through, and it is endangering the financial system while it remains so shaky and so reliant on wholesale funding markets. GE should face up to its responsibilities sooner rather than later.
Obviously, it plunged to huge losses last year, on sub-prime mortgage lending, but results yesterday reveal that it is further from a return to health than many had hoped.
Jeff Immelt, GE chief executive, said he was shrinking the business quickly back down to size, but there should be more urgency, if not for GE's shareholders then for the financial system as a whole. GE Capital is just the sort of "too big to fail" institution that shouldn't be allowed to exist outside of a heavily regulated bank, yet GE's efforts at the moment are concentrated on (successfully) lobbying to fend off quick implementation of the new financial sector reforms, which could have forced it to immediately recapitalise and probably divest the division.
GE Capital was again the weak spot of quarterly earnings yesterday, and the company admitted that its commercial real estate investments were tacking close to the most adverse scenario imagined under the US government's "stress test". Its insistence that the business does not need to be recapitalised – with big dilution to GE shareholders – looked even more hollow last night than it did before. It certainly will need to be when the financial reforms are enacted and newly empowered regulators sweep through, and it is endangering the financial system while it remains so shaky and so reliant on wholesale funding markets. GE should face up to its responsibilities sooner rather than later.
So, the bosses of Goldman Sachs and Morgan Stanley think the press, the public and the politicians should stop obsessing about the size of their employees' bonuses.
To David Viniar and John Mack I would say: in my experience, we are only reflecting the amount of time some of their employees spend thinking about the size of their bonuses.
Long may this important debate continue.
To David Viniar and John Mack I would say: in my experience, we are only reflecting the amount of time some of their employees spend thinking about the size of their bonuses.
Long may this important debate continue.
Richard Fisher, head of the Federal Reserve’s Dallas branch, calls the foreign exchange market a “manic depressive mechanism”, and we just closed a particularly manic week. To listen to the hubbub from the trading desks, you would think we have passed into a new world economic order, with the dollar consigned to history as the dominant reserve currency.
To all this, I just want to say: not so fast.
The inexorable rise of the Chinese economy, and the near-collapse of the US financial system last year, have absolutely altered the balance of power in economic affairs. There is no doubt that we are feeling our way in new territory, but what has struck me most this week has been the mountain of practical problems that switching from a dollar reserve system entails. The intellectual framework is not in place, the institutional framework is woefully compromised, there are too many economic interests ranged in favour of the status quo, and the Chinese renminbi is – quite frankly – an implausible alternative to the dollar.
For a start, the dollar is not collapsing. The dollar index, which measures the greenback against a basket of currencies, is indeed down 11.9 per cent since that old tax-and-spender Barack Obama came to power (as one anti-Obama newspaper pointed out yesterday), but the index is only back to the same level as at the end of 2007.
All we are doing currently is reversing the spike in the dollar that occurred in the post-Lehman Brothers panic, when investors the world over reached for the safest assets they could find. That they were dollar assets struck some as perverse when the US was at the heart of the meltdown, but it showed that, when push comes to shove, there is a core confidence in the US government and financial system that is not replicated elsewhere.
Will we be able to say that about a different currency? Will the combined brains of China, Russia, France, Japan and the Gulf Arab states really be able to weave a stable synthetic trading unit out of a basket of currencies, as they are considering for the trading of oil by the end of next decade? Will the International Monetary Fund’s “special drawing rights”, an artificial currency presently calculated as an amalgam of dollars, euros and sterling, really replace the dollar as a reserve currency, as China and others have suggested?
I am sceptical for a number of reasons. For all the weaknesses that have been exposed in the US economy, the dollar still strikes me as an attractive asset compared to a synthetic hybrid currency maintained by a shifting alliance of trading partners with conflicting economic needs, or by the IMF, which does not even appear able to have a civilised debate about how many seats round the table each nation gets, let alone what the weightings of their various currencies should be. Such a scheme ought to be killed at birth for being fundamentally unstable.
Gold bugs, sending their precious metal to record levels this week, see a new gold standard, ignoring that system’s inflexibility and careless of the deleterious effect it would have on world trade. You have only to watch the television for a few hours during the day here to become nervous about a bubble forming in the gold market. The trading of gold has gone mainstream, with adverts variously suggesting that people mail in their unwanted jewellery for cash or tempting them to buy box-loads of glittering gold coins. I am told that the comedy actor Vince Vaughn approached Congress’s best-known gold standard campaigner, Ron Paul, at a recent premiere to ask for advice about whether he should put his money into the precious metal. The echoes of the dot.com bubble are all around.
Finally, it is almost laughably early to start talking about the renminbi as an alternative for filling up the reserve vaults of central banks across Asia and beyond. The benign dictatorship of the Chinese communist party has brought the benefits of a long overdue industrial revolution in the world’s most populous nation, but I for one would prefer a reserve currency – designed to instil confidence – to be one grounded in an entrenched capitalist democracy, rather than one manipulated by a cabal of technocrats whose hold on power over a huge and fractious country is based on coercion. The Chinese communists have not yet built a self-sustaining economic model based on domestic demand, and growth forecasts that show the country’s GDP surpassing the US within a couple of decades ignore every risk of political instability.
Most important to me are the entrenched economic interests of nations – China included – whose reserves are overwhelmingly in dollars, and who have nothing to gain from precipitating its demise. More likely, they will gang up on the US to take the necessary actions to pull up the dollar, rather than walk away.
After a period of highfalutin talk about a new economic world order, kicked off by the formal shift of power from the Group of Seven to the G20 last month, we ought to pull our time horizons back to the foreseeable future. Do that and the conclusion is this: better the dollar you know than the devil you don’t.
My humble contribution to the debate over the shape of the recession. Enough with these Vs, Ls and Ws. It looks to me most like an ice cream cone. The recession began shallow, only to plunge deeper after the post-Lehman Brothers panic. Now we have a very strong snap back, while next year looks a lot more like shallow growth again.
Asian economies are already motoring ahead, and the consensus here is that the US economy has grown at an annualised rate of 3 per cent in the third quarter, with another 2.4 per cent to come in the remainder of the year. If anything, these look conservative estimates. A slide in the number of giant aircraft orders marred the headline durable goods figure for August – down 2.4 per cent, the Commerce department said yesterday – but strip out that volatile component and businesses do seem to be planning long-term investments once again. With inventories dangerously depleted, factories are clanking back to life. In fact, a close look at the reports coming in from regional branches of the Federal Reserve suggest that US manufacturing might be expanding faster than at any point since spring 2006.
That manufacturing revival is independent of government stimulus. It therefore has longevity, which is why a double-dip is unlikely. But traumatised US consumers are not going to go crazy with the credit cards again any time soon, and the cuts that individuals states have made to government spending will surely soon have to be joined by federal programme reductions, too, as Barack Obama's deadline for halving the deficit looms.
On second thoughts, perhaps the ice cream cone is too sweet a metaphor for so sour an economic journey.
Asian economies are already motoring ahead, and the consensus here is that the US economy has grown at an annualised rate of 3 per cent in the third quarter, with another 2.4 per cent to come in the remainder of the year. If anything, these look conservative estimates. A slide in the number of giant aircraft orders marred the headline durable goods figure for August – down 2.4 per cent, the Commerce department said yesterday – but strip out that volatile component and businesses do seem to be planning long-term investments once again. With inventories dangerously depleted, factories are clanking back to life. In fact, a close look at the reports coming in from regional branches of the Federal Reserve suggest that US manufacturing might be expanding faster than at any point since spring 2006.
That manufacturing revival is independent of government stimulus. It therefore has longevity, which is why a double-dip is unlikely. But traumatised US consumers are not going to go crazy with the credit cards again any time soon, and the cuts that individuals states have made to government spending will surely soon have to be joined by federal programme reductions, too, as Barack Obama's deadline for halving the deficit looms.
On second thoughts, perhaps the ice cream cone is too sweet a metaphor for so sour an economic journey.
It is an investment that offers the highest return for the lowest risk. And if that sounds too bankerish to describe charitable schemes that fund girls' education or university places for women in the developing world, then you have Lloyd Blankfein to blame for the phrase.
The Goldman Sachs chief executive was one of the speakers at the Clinton Global Initiative, the former US president Bill Clinton's annual meeting in New York this week, where there was a remarkable consensus among business leaders, politicians and the representatives of non-governmental organisations: schooling more girls, and encouraging women into work or entrepreneurship, not only liberates many from poverty and opens up a world of new and more equal opportunity; it can also boost a country's economy.
Academic work on this subject suggests that higher rates of female education can raise pay, productivity and the use of technology in a country and add perhaps 0.3 percentage points to GDP each year. There are further economic benefits because, if more educated women have fewer children, there is a boost in the percentage of the population at working age.
It seems likely that the effects multiply over time, as girls born to educated women elect to go even further in education than their mothers.
This buzz around female schooling and mentoring mustn't be allowed to dominate other important development goals, particularly around infrastructure projects. Education has its limits if there is no electricity to aid reading after dark; it is impossible if there are no local schools.
But the global recession appears to have exacerbated the gender divide in the developing world, making these efforts urgent. The World Bank identifies 33 countries, many of them in sub-Saharan Africa, where girls are likely to be pulled out of school to help cope with declining household income. The G20 was dishearteningly weak on the effects of the crisis in poorer countries in Pittsburgh this week, but the confluence of interest between business and charitable organisations on display at Clinton's "United Nations of Philanthropy" might actually prove more powerful than any inter-governmental declaration, in any case.
The language and practices of finance and philanthropy are merging. Charities talk not of "giving" but of "impact investing". There has been an explosion in the availability of microfinance, those small development loans that help an individual to start a small business or a cottage industry – the majority of which go to women.
The Clinton Global Initiative is, by the way, an extraordinary event, luring heads of state, Fortune 500 leaders and celebrities into one giant networking-fest, and then saying that no one will be invited back next year unless they pledge themselves to some philanthropic action or donation. Goldman promised to extend to Peru its 10,000 Women scheme, which funds business education for women and matches Goldman employees as mentors to developing world entrepreneurs.
I think that these sorts of programmes offer investment banks a route out of their reputational hell. The public are demanding reparations for the economic devastation wrought by their excessive risk-taking; and there is more than a dash of self-interest for the banks in funding economic empowerment schemes not just in the developing world but in the West, too.
Banks have always funded philanthropic projects, and many employees are committed in their private lives to public service of one kind or another, but now is the time for some grand gestures. What about compulsory community service for bankers? How about splitting bonuses a third, a third, a third between cash, shares and philanthropic vouchers that employees can contribute to causes of their choice? How about a Wall Street Global Initiative?
The sub-prime mortgage market is "toast". My mortgage company's products are "poison". The derivatives we've just offloaded to a client are "vomit". These are from internal emails across Wall Street as the credit market boom began to turn to bust (from Bear Stearns, Countrywide and UBS, respectively), and they have turned up in the first court cases in what looks set to be years of litigation and prosecutions.
The dot.com boom had nothing on what we've just been through, but there are parallels. Wall Street knows instinctively when something is a bubble, but the incentive is always to keep pumping out financial products at inflated values until the last possible minute. The malfeasance happens on the turn, as the clever try to offload their toxic products on the stupid. This is when their emails say one thing and they tell clients or investors another.
You hear the question all the time: why is no one in jail? To answer, I would say, patience. Enron collapsed in December 2001, but its chairman, Ken Lay, was not seen in handcuffs until July 2004. The FBI is combing assiduously through emails at Lehman Brothers; a grand jury has already been convened to assess whether to charge AIG's financial products head, Joseph Cassano.
With Wall Street back in bullish form, bankers have started condemning the "show trial" of Ralph Cioffi and Matthew Tannin, due to start next month. These two Bear Stearns managers, accused of lying to investors when their hedge funds were collapsing in 2007, are being made scapegoats for errors that were systemic, not personal or criminal, it is argued.
That might be true if they were the only ones facing criminal charges. But theirs is just a relatively easy case, from early in the crisis. It will not be the last.
The dot.com boom had nothing on what we've just been through, but there are parallels. Wall Street knows instinctively when something is a bubble, but the incentive is always to keep pumping out financial products at inflated values until the last possible minute. The malfeasance happens on the turn, as the clever try to offload their toxic products on the stupid. This is when their emails say one thing and they tell clients or investors another.
You hear the question all the time: why is no one in jail? To answer, I would say, patience. Enron collapsed in December 2001, but its chairman, Ken Lay, was not seen in handcuffs until July 2004. The FBI is combing assiduously through emails at Lehman Brothers; a grand jury has already been convened to assess whether to charge AIG's financial products head, Joseph Cassano.
With Wall Street back in bullish form, bankers have started condemning the "show trial" of Ralph Cioffi and Matthew Tannin, due to start next month. These two Bear Stearns managers, accused of lying to investors when their hedge funds were collapsing in 2007, are being made scapegoats for errors that were systemic, not personal or criminal, it is argued.
That might be true if they were the only ones facing criminal charges. But theirs is just a relatively easy case, from early in the crisis. It will not be the last.
It has been a week of anniversaries, a week of recollections and reflections, of learning lessons from the collapse of Lehman Brothers and the broader credit crisis that crescendoed that week last September. There have been lists of the failures that led us to disaster, the failures of banking, economics and regulatory oversight, all of which are being tackled – imperfectly, but tackled.
I'm not sure, though, that we have done much to address one of the biggest failures of all, the failure of democracy.
The public anger vented at bankers, and the Schadenfreude enjoyed this week from seeing again all those photos of Lehman employees with their boxes, is so acute not just because Wall Street's activities ruined our livelihoods and wrecked our governments' finances. It is because these were activities we had no idea Wall Street was up to.
None of this activity was secret. But it was ignored. The multi-trillion dollar credit markets churn away, day after day, and there is barely a soul outside of the industry who knows anything about what they are used for. There was precisely zero political debate about those uses, scandalously little media coverage of their extraordinary growth, even on the businesses pages.
Who knew that their mortgage might have been sold to hundreds of other investors? Who knew that their employer might have been paying wages not out of a bank account, but out of short-term debt raised in the credit markets? Who really knew that we had grown a whole shadow banking system that was unprotected from runs, the way that the old-fashioned banking system has been protected since the Great Depression?
The liberal pioneers of democracy always argued that extending suffrage should go hand in hand with the extension of public education. In the modern era we call this transparency, and we insist on it from governments and corporations and all those with power, so that they can be held to account.
Yet somewhere there is a democratic deficit, because all these facts don't add up to understanding. In my experience, articulate and educated people rage against bailing out the banks, without really being able to make the connections between Wall Street and the rest of us. For those of us in business journalism who have been writing about the crisis for more than two years now, it has been a marathon run at sprint speed, having to switch our attentions from the easy-to-track equity markets to the much more complex credit markets. We have had to hastily learn about parts of finance that we'd either dismissed as a backwater or had never even heard of in the first place. It has been hard. That's probably why we didn't do it in the first place.
Even now, I find hardly anyone who realises, in the post-Lehman chaos and the run on the money markets, that we were just a couple of days from companies not being able to pay their workers, with terrifying implications. The politicians and regulators at the heart of it, rightly scared of panic, censored themselves. Clearly, the media didn't find the right words at the time.
Bankers' bonuses we understand. But modern banking itself? Not so much. The democratic deficit remains.
Governments will do quite well, I think, bringing in the reforms necessary to prevent a repeat of this crisis. But as for spotting the next occasion when finance is changing the way the world works, and in potentially dangerous ways? That doesn't seem likely without some sort of major public education effort.
That means the schools for starters. This newspaper has periodically campaigned for compulsory personal finance lessons, so that students are equipped to make good choices on saving and borrowing, and an important part of those lessons could be teaching where financial products come from. You would learn about the motives of, and pressures on, the people trying to sell you them, and get to fill in more of the big picture of global finance.
It also requires new efforts by the media to properly reflect finance's importance, something that ought not be too hard given that the capital markets now hold the fate of debt-burdened governments in their hands. It requires politicians to talk about more than just bonuses, and it puts a responsibility on all of us individually to seek information and educate ourselves.
The credit crisis was a failure of oversight, all right. Ours.
I'm not sure, though, that we have done much to address one of the biggest failures of all, the failure of democracy.
The public anger vented at bankers, and the Schadenfreude enjoyed this week from seeing again all those photos of Lehman employees with their boxes, is so acute not just because Wall Street's activities ruined our livelihoods and wrecked our governments' finances. It is because these were activities we had no idea Wall Street was up to.
None of this activity was secret. But it was ignored. The multi-trillion dollar credit markets churn away, day after day, and there is barely a soul outside of the industry who knows anything about what they are used for. There was precisely zero political debate about those uses, scandalously little media coverage of their extraordinary growth, even on the businesses pages.
Who knew that their mortgage might have been sold to hundreds of other investors? Who knew that their employer might have been paying wages not out of a bank account, but out of short-term debt raised in the credit markets? Who really knew that we had grown a whole shadow banking system that was unprotected from runs, the way that the old-fashioned banking system has been protected since the Great Depression?
The liberal pioneers of democracy always argued that extending suffrage should go hand in hand with the extension of public education. In the modern era we call this transparency, and we insist on it from governments and corporations and all those with power, so that they can be held to account.
Yet somewhere there is a democratic deficit, because all these facts don't add up to understanding. In my experience, articulate and educated people rage against bailing out the banks, without really being able to make the connections between Wall Street and the rest of us. For those of us in business journalism who have been writing about the crisis for more than two years now, it has been a marathon run at sprint speed, having to switch our attentions from the easy-to-track equity markets to the much more complex credit markets. We have had to hastily learn about parts of finance that we'd either dismissed as a backwater or had never even heard of in the first place. It has been hard. That's probably why we didn't do it in the first place.
Even now, I find hardly anyone who realises, in the post-Lehman chaos and the run on the money markets, that we were just a couple of days from companies not being able to pay their workers, with terrifying implications. The politicians and regulators at the heart of it, rightly scared of panic, censored themselves. Clearly, the media didn't find the right words at the time.
Bankers' bonuses we understand. But modern banking itself? Not so much. The democratic deficit remains.
Governments will do quite well, I think, bringing in the reforms necessary to prevent a repeat of this crisis. But as for spotting the next occasion when finance is changing the way the world works, and in potentially dangerous ways? That doesn't seem likely without some sort of major public education effort.
That means the schools for starters. This newspaper has periodically campaigned for compulsory personal finance lessons, so that students are equipped to make good choices on saving and borrowing, and an important part of those lessons could be teaching where financial products come from. You would learn about the motives of, and pressures on, the people trying to sell you them, and get to fill in more of the big picture of global finance.
It also requires new efforts by the media to properly reflect finance's importance, something that ought not be too hard given that the capital markets now hold the fate of debt-burdened governments in their hands. It requires politicians to talk about more than just bonuses, and it puts a responsibility on all of us individually to seek information and educate ourselves.
The credit crisis was a failure of oversight, all right. Ours.
The nationalisation of Fannie Mae and Freddie Mac, the US mortgage giants, one year ago this week was the most shocking event ever in American finance – for precisely seven days. Unlike for Lehman Brothers, there have been no television dramatisations of the last days of Fannie and Freddie, but the anniversary was marked by a provocative report from the independent Government Accountability Office here, which sets out the options for restructuring these enormous institutions.
Before they collapsed, Fannie and Freddie owned or guaranteed almost half of all outstanding mortgage debt. They had an implicit government guarantee, which meant they could borrow at close to Treasury rates, and that meant the plain vanilla mortgages they bought and packaged into securities were, in effect, subsidised by the US government, making home ownership cheaper. They were private companies, though, and their shareholders got fat as the firms dabbled with riskier mortgage investments. It was an extraordinary public-private hybrid and it ended in disaster.
Under the current government "conservatorship", Fannie and Freddie are more important than ever in keeping mortgage rates down because private lenders have fled. The Obama administration has kicked restructuring proposals into next year.
What's to do? The choice must surely be between selling them off and turning them into a department of the government. I can't think of a better example of moral hazard than the old hybrid model. Full absorption by the government is superficially attractive, particularly if Fannie and Freddie are given a much more explicit counter-cyclical mission. They could ramp up their purchases of mortgages next time there is a private-sector famine. They could also reinvigorate the part of their mission that charges them to subsidise mortgages for particular disadvantaged groups and regions.
Those important roles can be achieved via other means, however, and should be. The Federal Reserve is a better institution for managing the economic cycle and governing the amount of credit in the economy, and it can attack specific credit markets and specific asset prices if it wants. Under quantitative easing, it has been buying mortgage-backed securities directly, not just Treasuries. Likewise, home ownership programmes can be channelled through other agencies, such as the Federal Housing Administration.
Breaking up and privatising Fannie and Freddie has the added advantage of removing a government-supported competitor to Wall Street, which might mean the banks spend more time buying and selling socially useful mortgages, and less time dreaming up exotic mortgage derivatives based on the exploitation of people who can't afford home loans in the first place.
Before they collapsed, Fannie and Freddie owned or guaranteed almost half of all outstanding mortgage debt. They had an implicit government guarantee, which meant they could borrow at close to Treasury rates, and that meant the plain vanilla mortgages they bought and packaged into securities were, in effect, subsidised by the US government, making home ownership cheaper. They were private companies, though, and their shareholders got fat as the firms dabbled with riskier mortgage investments. It was an extraordinary public-private hybrid and it ended in disaster.
Under the current government "conservatorship", Fannie and Freddie are more important than ever in keeping mortgage rates down because private lenders have fled. The Obama administration has kicked restructuring proposals into next year.
What's to do? The choice must surely be between selling them off and turning them into a department of the government. I can't think of a better example of moral hazard than the old hybrid model. Full absorption by the government is superficially attractive, particularly if Fannie and Freddie are given a much more explicit counter-cyclical mission. They could ramp up their purchases of mortgages next time there is a private-sector famine. They could also reinvigorate the part of their mission that charges them to subsidise mortgages for particular disadvantaged groups and regions.
Those important roles can be achieved via other means, however, and should be. The Federal Reserve is a better institution for managing the economic cycle and governing the amount of credit in the economy, and it can attack specific credit markets and specific asset prices if it wants. Under quantitative easing, it has been buying mortgage-backed securities directly, not just Treasuries. Likewise, home ownership programmes can be channelled through other agencies, such as the Federal Housing Administration.
Breaking up and privatising Fannie and Freddie has the added advantage of removing a government-supported competitor to Wall Street, which might mean the banks spend more time buying and selling socially useful mortgages, and less time dreaming up exotic mortgage derivatives based on the exploitation of people who can't afford home loans in the first place.
We've finally got the in-house investigation by the Securities and Exchange Commission into the agency's failure to spot that Bernard Madoff was running a $65bn (£40bn) Ponzi scheme under their very nose. It is breathtaking stuff.
The catalogue of incompetence is not the surprise. The agency has long seemed content to train an army of paper-pushing solicitors, interested only in box-ticking "compliance", when they should in fact be training staff to be dogged private detectives.
The most shocking revelation is how staff are in thrall to the dazzling brilliance of Wall Street, or cowed by the power of its main players. So often they took Madoff's word at face value. They dismissed Harry Markopolos, the sleuth who called Madoff a Ponzi scheme back in 2005, as a nut, because he was not a Wall Street insider.
A senior executive in Washington told junior members of the investigative team in New York to remember that Madoff was "a very well-connected, powerful person". Madoff spent so much of his time when inspectors were around namedropping their seniors precisely because he assumed it would be effective.
There are powerful echoes of the complaint that the SEC examiner Gary Aguirre made last year, when he said he had been told to lay off his investigation of Pequot Capital and its well-connected boss Art Samberg. He was sacked. Only now do Pequot and Mr Samberg now look likely to be charged.
The SEC says it is overhauling its training and beefing up its powers of subpoena following the Madoff case. The inspector-general's report suggests it will be a long process. If ever there is a dossier that proves regulatory capture, it is this.
The catalogue of incompetence is not the surprise. The agency has long seemed content to train an army of paper-pushing solicitors, interested only in box-ticking "compliance", when they should in fact be training staff to be dogged private detectives.
The most shocking revelation is how staff are in thrall to the dazzling brilliance of Wall Street, or cowed by the power of its main players. So often they took Madoff's word at face value. They dismissed Harry Markopolos, the sleuth who called Madoff a Ponzi scheme back in 2005, as a nut, because he was not a Wall Street insider.
A senior executive in Washington told junior members of the investigative team in New York to remember that Madoff was "a very well-connected, powerful person". Madoff spent so much of his time when inspectors were around namedropping their seniors precisely because he assumed it would be effective.
There are powerful echoes of the complaint that the SEC examiner Gary Aguirre made last year, when he said he had been told to lay off his investigation of Pequot Capital and its well-connected boss Art Samberg. He was sacked. Only now do Pequot and Mr Samberg now look likely to be charged.
The SEC says it is overhauling its training and beefing up its powers of subpoena following the Madoff case. The inspector-general's report suggests it will be a long process. If ever there is a dossier that proves regulatory capture, it is this.
