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The Financial Re-Regulatory Agenda

Posted by Robert Weissman on September 23rd, 2008

As the Federal Reserve and Treasury Department careen from one financial meltdown to another, desperately trying to hold together the financial system -- and with it, the U.S. and global economy -- there are few voices denying that Wall Street has suffered from "excesses" over the past several years.

The current crisis is the culmination of a quarter century's deregulation. Even as the Fed and Treasury scramble to contain the damage, there must be a simultaneous effort to reconstruct a regulatory system to prevent future disasters.

There is more urgency to such an effort than immediately apparent. If the Fed and Treasury succeed in controlling the situation and avoiding a collapse of the global financial system, then it is a near certainty that Big Finance -- albeit a financial sector that will look very different than it appeared a year ago -- will rally itself to oppose new regulatory standards. And the longer the lag between the end (or tailing off) of the financial crisis and the imposition of new legislative and regulatory rules, the harder it will be to impose meaningful rules on the financial titans.

The hyper-complexity of the existing financial system makes it hard to get a handle on how to reform the financial sector. (And, by the way, beware of generic calls for "reform" -- for Wall Street itself taken up this banner over the past couple years. For the financial mavens, "reform" still means removing the few regulatory and legal requirements they currently face.)

But the complexity of the system also itself suggests the most important reform efforts: require better disclosure about what's going on, make it harder to engage in complicated transactions, prohibit some financial innovations altogether, and require that financial institutions properly fulfill their core responsibilities of providing credit to individuals and communities.

(For more detailed discussion of these issues -- all in plain, easy-to-understand language, see these comments from Damon Silvers of the AFL-CIO, The American Prospect editor Robert Kuttner, author of the The Squandering of America and Obama's Challenge, and Richard Bookstaber, author of A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation.)

Here are a dozen steps to restrain and redirect Wall Street and Big Finance:

1. Expand the scope of financial regulation. Investment banks and hedge funds have been able to escape the minimal regulatory standards imposed on other financial institutions. Especially with the government safety net -- including access to Federal Reserve funds -- extended beyond the traditional banking sector, this regulatory black hole must be eliminated.

2. Impose much more robust standards for disclosure and transparency. Hedge funds, investment banks and the off-the-books affiliates of traditional banks have engaged in complicated and intertwined transactions, such that no one can track who owes what, to whom. Without this transparency, it is impossible to understand what is going on, and where intervention is necessary before things spin out of control.

3. Prohibit off-the-books transactions. What's the purpose of accounting standards, or banking controls, if you can evade them by simply by creating off-the-books entities?

4. Impose regulatory standards to limit the use of leverage (borrowed money) in investments. High flyers like leveraged investments because they offer the possibility of very high returns. But they also enable extremely risky investments -- since they can vastly exceed an investor's actual assets -- that can threaten not just the investor but, if replicated sufficiently, the entire financial system.

5. Prohibit entire categories of exotic new financial instruments. So-called financial "innovation" has vastly outstripped the ability of regulators or even market participants to track what is going on, let alone control it. Internal company controls routinely fail to take into account the possibility of overall system failure -- i.e., that other firms will suffer the same worst case scenario -- and thus do not recognize the extent of the risks inherent in new instruments.

6. Subject commodities trading to much more extensive regulation. Commodities trading has become progressively deregulated. As speculators have flooded into the commodities markets, the trading markets have become increasingly divorced from the movement of actual commodities, and from their proper role in helping farmers and other commodities producers hedge against future price fluctuations.

7. Tax rules should be changed so as to remove the benefits to corporate reliance on debt. "Payments on corporate debt are tax deductible, whereas payments to equity are not," explains Damon Silvers of the AFL-CIO. "This means that, once you take the tax effect into account, any given company can support much more debt than it can equity." This tax arrangement has fueled the growth of private equity firms that rely on borrowed money to buy corporations. Many are now going bankrupt.

8. Impose a financial transactions tax. A small financial transactions tax would curb the turbulence in the markets, and, generally, slow things down. It would give real-economy businesses more space to operate without worrying about how today's decisions will affect their stock price tomorrow, or the next hour. And it would be a steeply progressive tax that could raise substantial sums for useful public purposes.

9. Impose restraints on executive and top-level compensation. The top pay for financial impresarios is more than obscene. Executive pay and bonus schedules tied to short-term performance played an important role in driving the worst abuses on Wall Street.

10. Revive competition policy. The repeal of the Glass-Steagall Act, separating traditional banks from investment banks, was the culmination of a progressive deregulation of the banking sector. In the current environment, banks are gobbling up the investment banks. But this arrangement is paving the way for future problems. When the investment banks return to high-risk activity at scale (and over time they will, unless prohibited by regulators), they will directly endanger the banks of which they are a part. Meanwhile, further financial conglomeration worsens the "too big to fail" problem -- with the possible failure of the largest institutions viewed as too dangerous to the financial system to be tolerated -- that Treasury Secretary Hank Paulson cannot now avoid despite his best efforts. In this time of crisis, it may not be obvious how to respect and extend competition principles. But it is a safe bet that concentration and conglomeration will pose new problems in the future.

11. Adopt a financial consumer protection agenda that cracks down on abusive lending practices. Macroeconomic conditions made banks interested in predatory subprime loans, but it was regulatory failures that permitted them to occur. And it's not just mortgage and home equity loans. Credit card and student loan companies have engaged in very similar practices -- pushing unsustainable debt on unreasonable terms, with crushing effect on individuals, and ticking timebomb effects on lenders.

12. Support governmental, nonprofit, and community institutions to provide basic financial services. The effective governmental takeover of Fannie Mae, Freddie Mac and AIG means the U.S. government is going to have a massive, direct stake in the global financial system for some time to come. What needs to be emphasized as a policy measure, though, is a back-to-basics approach. There is a role for the government in helping families get mortgages on reasonable terms, and it should make sure Fannie and Freddie, and other agencies, serve this function. Government student loan services offer a much better deal than private lender alternatives. Credit unions can deliver the basic banking services that people need, but they need back-up institutional support to spread and flourish.

What is needed, in short, is to reverse the financial deregulatory wave of the last quarter century. As Big Finance mutated and escaped from the modest public controls to which it had been subjected, it demanded that the economy serve the financial sector. Now it's time to make sure the equation is reversed.

http://www.multinationalmonitor.org/editorsblog/

Robert Weissman is managing director of the Multinational Monitor.



Bye, American

Posted by Mark Floegel on March 19th, 2008


You might have heard the story about General Motors Vice Chairman Bob Lutz. At a recent closed-door meeting with reporters, the 76-year-old, who’s in charge of product development said he thinks global warming theory is “a total crock of sh*t” and that hybrid cars “make no economic sense.”

As you might expect, the people who cover both the auto industry and the environment went nuts. Mr. Lutz eventually responded to the uproar with a post on GM’s blog site (or at least a 26-year-old administrative assistant posted a response for him).

In the blog, Mr. Lutz called his remarks “an offhand comment.” “But I think that the people making a big deal out of it are missing the real point,” he wrote. “My beliefs are mine and I have a right to them, just as you have a right to yours.”

I don’t think anyone’s questioning Mr. Lutz’s right to have an opinion. I think, instead, when Mr. Lutz was kind enough to treat the world to his unvarnished thoughts, we all had an “Aha!” moment explaining why Toyota is overtaking GM as the world’s largest automaker.

Hybrid vehicles “make no economic sense” to Mr. Lutz, who undoubtedly basks in a bloated bath of cash thanks to his salary ($8 million per year), bonus and perks, but the for rest of us poor schmucks, trying to pony up what will soon be four dollars per gallon at the pump, hybrid cars make a world of economic sense and again, explains why Toyota is eating Mr. Lutz’s lunch.

“Instead of simply assailing me for expressing what I think, they should be looking at the big picture,” Mr. Lutz wrote. “What they should be doing, in earnest, is forming opinions not about me but about GM, and what this company is doing that is — and will continue to be — hugely beneficial to the very causes they so enthusiastically claim to support.”

Really? As fate would have it, I’ve driven three rental cars in the past week. One was a Hyundai Sonata, one a Dodge Avenger and one a Chevrolet Cobalt, from Mr. Lutz’s beloved GM.

The Cobalt was – to paraphrase Bob Lutz – a total piece of sh*t. It was cramped, handled poorly; the interior was made of such cheap plastic that I was afraid I’d a) die from off-gas fumes or b) snap off the handle when I went to open the door. The icing on this cake of deficiency was the fact that the little monster sucked down gas like a fleet of overloaded semis. Yet another wonderful product from GM, polluting the atmosphere and making people poor and miserable while it careens toward an early grave in the junkyard. Thanks, Bob.

My favorite – by far – was the Hyundai. It was comfortable, roomy, responsive and got decent gas mileage. The Dodge fell somewhere in between.

Mr. Lutz wrote, “My opinions on the subject [of global warming] — like anyone’s — are immaterial. Really.”

Really? GM pays you eight million dollars a year and doesn’t give a sh*t (I hate to keep using this word, but you brought it up, Bob) what you think?

And, really? Everyone’s opinion on global warming is immaterial? Perhaps that’s true. No one’s opinion counts except that of the decider, George W. Bush and he’s decided we need to keep pumping oil and mining coal.

Bob Lutz is a walking embodiment of what’s wrong with America’s industrial policy. He’s got his head so far up his own ass that everything looks like a crock of sh*t to him. Someone find this bozo a gold watch and let’s get on with trying to save ourselves from the internal combustion engine.

http://markfloegel.org/2008/03/06/bye-american/ 

How We Got Here: Post-Doctoral Division

Posted by Brooke Shelby Biggs on June 16th, 2006

The New Left Review will either excite or exhaust your brain. But if you want to see the rise of capitalism on a global scale through the eyes of an economist who speaks economese, this is your guy: Robin Blackburn. I'm not saying I understood the whole thing (I wonder if many outside the ivy-clad ivory towers could), but the whole issue of how corporations came to be the driving force in almost everything in the world, and how money became both the ends and the means to all things, is somewhere here between the lines.

The NLR summarizes the piece thusly: "The concept of alternative futures, banished from postmodernity’s eternal present, flourishes on the financial summits of the global economy. Robin Blackburn argues against a neo-Luddite dismissal of the new financial engineering techniques by the Left, while coolly assessing the economic and social costs of their current configurations."

Uh-huh. I almost said that.

The gist is, once you see everything - people, the environment, cultures - as commodities, it all makes perfect sense. Of course, money doesn't have a soul.

Therefore, this begins to appear to be a genius corporate philosophy:

In the years 2001–03 about three million jobs were lost in the United States. By the turn of the century Enron’s managers had become famous for a regime in which each employee knew that one tenth of the staff, those who failed to reach trading targets, would be sacked each year, no matter how good or bad the overall performance. Many of the most powerful corporations today do their best to avoid having a workforce; instead they out-source and sub-contract.

We've seen see how well that works.

Ultimately, the soveriegnty of financial institutions that make this entire "financialization" thing work, actually causes corporations and the system they have creates, self-destruct (see Enron, WorldCom, Delphi et al):

[F[inancial profits over the last decade have mainly taken the form of the cancellation of promises made to employees—exploitation over time—the erosion of small capital holdings by large and unscrupulous money managers and the swallowing of shoals of tiny fish by a shark-like financial services industry. Few of the gains from the reallocation of capital through superior risk assessment have been channelled to production. Financial profits have instead prompted a surge in upscale real-estate prices and the turnover of the luxury goods sector. The mass of employees and consumers have sunk deeper into debt. Yawning domestic inequalities have been compounded by escalating international imbalances, with an inflow of foreign capital covering a deficit on the us current account. With a sagging dollar, an oil price shock and rising interest rates, American households—the consumers of first and last resort—are likely to find the strain of carrying the world on their shoulders ever more difficult. Financialization promotes such a skewed distribution of income that it ends by undermining its own credit-driven momentum.

Took the words right out of my mouth.