Chance to reform the Street is fading

From left, Representative Barney Frank; Mayor Michael R. Bloomberg; former Federal Reserve Chairman Paul Volcker; Christina D. Romer, the chairwoman of the Council of Economic Advisers; and Treasury Secretary Timothy F. Geithner listened to President Obama's speech at Federal Hall.

A crisis has been wasted. Reform is near impossible now. Whatever does get done will be incremental and minuscule.


President Obama on Monday sternly admonished the financial industry and lawmakers to accept his proposals to reshape financial regulation to protect the nation from a repeat of the excesses that drove Lehman Brothers into bankruptcy and wreaked havoc on the global economy last year.

Not one CEO was at the speech; that pretty much tells what they think about it.

But with the markets slowly healing, Mr. Obama’s plan to revamp financial rules faces a diminishing political imperative. Disenchantment by many Americans with big government, along with growing obstacles from financial industry lobbyists pressing Congress not to do anything drastic, have also helped to stall his proposals.

Financial firms oppose a proposed consumer protection agency. That makes their attitude quite clear.

Video
Obama Urges Stronger Finance Rules

Obama Speech on Finance Rules, Part 2

Related

U.S. Is Finding Its Role in Business Hard to Unwind (September 14, 2009)
City Room: Obama and Bill Clinton Have Lunch in the VillageText of Obama’s Speech on Financial Reform

Survivor of Nazi brutality ascended Wall Street

Andrew Lanyi: 1925-2009









In a Hungarian accent so thick that some of his clients could barely understand his recommendations, Mr. Lanyi dispensed pearls of wisdom that became part of his legend.

He listed a dozen of his favorites in his 1992 memoir, "Confessions of a Stockbroker." Among them: "The only people who sell at the highs and buy at the lows are liars." And then there was his sure-fire deal-closer: "You and I want to swim the English Channel, let's put our toe in the water."




Mr. Lanyi's immersion extended to holding most of the stocks he recommended, something that many Wall Street firms have tried to avoid by separating brokerage and analysis. But to Mr. Lanyi, owning what he recommended was proof of his credibility.

What he did was an old-fashioned custom of putting your money where your mouth is; what big firms did was to pump up stocks of firms they did business with in order to benefit underhandedly. Separating brokerage and analysis was a sham, when both functions were performed by the same firm.

"What everyone knows isn't worth knowing," he often said, attributing the quote to journalist Walter Lippmann.

A native of Budapest, Mr. Lanyi was enslaved during World War II to help the Germans build airports and other facilities for the Wehrmacht. "It was vastly better than being locked into a concentration camp," he wrote in his memoir. He crossed the border into Austria during the 1956 Soviet crackdown in Hungary, and managed to make it to the United States.

For his funeral, an announcement read in part: "Guests are encouraged to wear primary colors or bright clothing in memory of Andrew's colorful style of dressing."

Fortress on Both Sides of Talks

A specialty of Wall Street:

Multipronged Fortress

The Issue: Fortress is both an equity investor in and lender to real-estate
and railroads firm Florida East Coast Industries Inc.

The Conflict: The company is trying to restructure a $1.5 billion loan,
pitting the interests of Fortress clients against one another.

The Future: Private-equity firms are facing new conflicts as they buy up
the debt of companies they own.

This forms invests in and lends to

Futures Climb on Goldman Results

The best on the Street seems to be back.

Goldman Sachs shares were hovering around the flat line on Tuesday. The bank's profit smashed through analyst estimates after its fixed income, currency and commodities unit posted record quarterly revenue. Goldman posted income of $3.44 billion, or $4.93 a share, up from $2.09 billion, or $4.58 a share, a year earlier. The latest results included a $426 million dividend related to the company's paying back its TARP funds. Excluding that, earnings were $5.71 a share, which beat analyst estimates by more than $2 a share. Net revenue jumped 46% to $13.76 billion.

Read: The latest results included a $426 million dividend related to the company's paying back its TARP funds. So the Treasury made money on its investment: $426 million on $10 billion. On June 19 a story confirmed that GS was one of the institutions that had repaid the Treasury (on 17 June). So perhaps GS had TARP funds for six months; the Treasury made about 8.5% in such a case. Not bad.

But many in the market had expected Goldman to post a strong quarter, and in fact stock futures moved off their best levels of the day after the bank's results.

Kept a Tight Focus on Customers

An interesting obituary about a businessman who resisted the trends of modern Wall Street, keeping his St. Louis-based brokerage house focused: he "nurtured the firm's reputation for personal service even while increasing the number of branches to nearly 700 from fewer than 50 in 1967, when he became president."

Mr. Edwards took pride in his perch in what he called "the valley between the coasts" and said that his firm served "John Doe American." The firm burnished its reputation as a retail broker with a tight focus on customers. Mr. Edwards answered his own phone, held monthly conference calls with the whole company and spent weeks each year visiting the branch offices. For a decade, A.G. Edwards was ranked in Fortune's annual list of 100 Best Companies to Work for in America.

Imagine many other executives answering their own phones? No, they're too busy.

Yet some considered the firm a bit sleepy for its aversion to Internet trading and the diverse offerings of the large-scale "financial supermarkets" that were starting to take off. When Mr. Edwards retired in 2001, revenues were off in a soft market and speculation was that A.G. Edwards was ripe for a takeover.

The prime financial supermarket was Citigroup, the behemoth that Sandy Weill put together, which is teetering on complete collapse, and would have already failed but for billions of federal bailout funds.

Following Mr. Edwards's retirement, Robert L. Bagby was made chairman and CEO, the first time in the firm's history that it was run by a nonfamily member. Within months, the first layoffs in the firm's history were announced. Aligning A.G. Edwards with industry norms, executive pay went up and broker commissions were cut back.

And where did it all wind up? In disaster.

Some 'Other' Wall Streets Embarrassed

"This is the real Wall Street,' says Mark Rosenstein, chef/proprietor of the Market Place restaurant on Wall Street (the one in Asheville, N.C.).



"If I ran this restaurant like the bankers ran their business, I would no longer have a job," says Celinda Knight, manager of the Wall Street Bar & Grill, on East Wall Street in Midland, Texas, childhood home of former President George W. Bush.

That is probably what infuriates people more than anything else: the double standard. That they get bailed out with our money is also infuriating.

Anger over runaway trading, financial engineering and compensation by financial companies has a strong resonance along at least 955 country roads, suburban streets and downtown blocks named Wall Street or something close to that. From Abilene, Texas, to south Los Angeles to Zeeland, Mich., these residents and business are wrestling both with the recession and the ignominy of a truly fallen address. (Never mind that most Wall Street financial firms aren't literally located on Wall Street, nor is The Wall Street Journal.)

"My father's always joked: 'My daughter works on Wall Street,'" says Robin Campbell, owner of Dolce Vita, an eclectic boutique halfway on Asheville's Wall Street that is stocked with handbags, earrings and wine. "Now he doesn't joke about that."

On Wall Streets throughout the country, the dominant view is that their New York cousins deserve their ruined reputation.

There is such a disconnect between normal people and financiers. Politicians straddle the two worlds, getting money from the latter, votes from the former.
As much as people on "other" Wall Streets want to distance themselves from the one known around the world, they can't escape its economic reach. In January, Asheville's unemployment rate hit 8.7%, up from 4.4% a year earlier. Tourism, the area's most important business, is slowing. Once-red-hot mountain real-estate developments are dormant.

TARP Cop

Recession Job Losses Top 4 Million is today's headline. The government has poured trillions of dollars into stabilizing the financial system, trying to stave off an economic calamity. Part of that is attempting to steady banks by giving them capital. It is essential that credit markets work again. The Troubled Assets Relief Program, a bumbling piece of legislation that Bush and Paulson left the nation saddled with, is a 700 billion dollar rescue package. 700 billion is a lot of money, a lot of taxpayer money, and the government has a right, and an obligation, to make sure it is spent prudently and wisely. The first part of $350 billion disappeared into a banking black hole.

Neil Barofsky, the man overseeing the $700 billion bailout, is armed with broad authority, including the right to carry a handgun and the power to subpoena. As special inspector general for the Troubled Asset Relief Program, he is charged with tracking the bailout funds. In the process, Mr. Barofsky is ruffling feathers on Wall Street and in Washington, demanding access and information some aren't eager to provide.

The mentality that got us inot this mess has not changed much.

Lawyers at institutions that have received government aid are trying to figure out how much leeway they have to push back against Mr. Barofsky, say people familiar with the matter. Some government officials say they are concerned about Mr. Barofsky's aggressive approach.

Instead of being open and forthcoming, institutions that have received TARP funds are using lawyers to finesse it, to hide, to conceal.

Mr. Barofsky ... is a former prosecutor who has tackled white-collar crime and international drug traffickers. He keeps a wooden knife from Colombia as a reminder of just how violent crime can become. Now he can roam the halls of Wall Street almost unfettered. His powers, granted by Congress last fall, give him the right to investigate and audit "the purchase, management and sale of assets under TARP."

His mission is clear, unequivocal: investigate and audit TARP funds.

He takes his mission seriously and views his mandate broadly. In an interview, Mr. Barofsky says his office has "the right to investigate and audit any TARP dollar, anywhere it goes" and to go after any type of TARP-related fraud.

It is good, for a change, that the government is the party with the hard-charging, focused, aggressive lawyer.

The position carries greater reach and independence than the other two "special" inspector generals overseeing the Iraq and Afghanistan reconstructions. Those officials answer to the secretaries of state and defense, while Mr. Barofsky answers directly to Congress.

Good charter. Intention seems quite clear.

Some within the government worry Mr. Barofsky's approach is scaring away participation in the government's rescue programs, rendering them less effective. Government officials say they saw a spike in banks withdrawing TARP applications after Mr. Barofsky said he would require documentation on how they are using the funds. Some of that spike could be due to congressional rumblings about stricter oversight.

Want the money? Answer questions, and be (o, that word) transparent.

Some hedge funds are leery about the Fed's lending facility because of the heightened scrutiny that would result, a condition included at the behest of Mr. Barofsky.

Lack of accountability and clarity are exactly the reasons why we are in this mess.

Mr. Barofsky says his purpose is to make sure taxpayer money is spent the way Congress intended, and to go after anyone, inside or outside government, who misuses the funds. "Members of Congress told me repeatedly that they want me to be the person who goes after the people who want to steal," he says.

Amen.

Congress is moving to head off any challenges to his authority. Legislation passed by the Senate, soon to be considered by the House, would codify Mr. Barofsky's authority to peer into any firm benefiting from TARP dollars.

As if it were not already crystal clear.

Execs grabbed big bucks just before bailout

Guess who? What a bunch of idiots.

In all, Merrill doled out $3.6 billion in bonuses just days before Bank of America finalized its deal to buy the collapsing firm - with the help of $45 billion in taxpayer money.

Greed doesn't cover it. Arrogance.

Cuomo's investigators have been particularly interested in Merrill's rush to pay the perks in December, a month before the usual January bonus timetable.

This is more than arrogant; it borders on the illegal.

One beneficiary was Peter Kraus, a Thain hire who started at Merrill in mid-September and quit Dec. 18, the day Bank of America took over.

He was at the firm for 3 months?

He walked away with a $24.9 million bonus for those three months of work, which figures to about $249,000 a day. The day he quit, his wife closed on a $36 million luxury Park Ave. co-op, records show.

Yup, three months; it was in his contract.
Cuomo reveals 4 top Merrill Lynch execs grabbed big bucks just before government-financed takeover

by Greg B. Smith - Daily News - Wednesday, February 11th 2009, 4:00 AM

Four of the top executives at Merrill Lynch pocketed $121 million in bonuses just before taxpayers helped finance a takeover of the failing firm, the Daily News has learned.

The flush foursome each pocketed payments ranging from $18 million to $39 million, investigators from the state attorney general's office found.

Attorney General Andrew Cuomo for the past month has been examining the highly suspicious timing of the last-minute Merrill handouts.

In all, Merrill doled out $3.6 billion in bonuses just days before Bank of America finalized its deal to buy the collapsing firm - with the help of $45 billion in taxpayer money.

Cuomo presented his initial findings Tuesday to Rep. Barney Frank (D-Mass.), whose House Financial Services Committee holds hearings Wednesday in Washington on how banks are spending bailout funds.

"One disturbing question that must be answered is whether Merrill Lynch and Bank of America timed the bonuses in such a way as to force taxpayers to pay for them through the deal funding," Cuomo wrote to Frank.

Cuomo's investigators have been particularly interested in Merrill's rush to pay the perks in December, a month before the usual January bonus timetable.

Cuomo called the decision to accelerate the bonuses "a surprising fit of corporate irresponsibility" that "richly rewarded their failed executives."

Cuomo has subpoenaed former Merrill Chief Executive Officer John Thain and Bank of America's chief administrative officer, Steele Alphin, about the bonuses.

When Cuomo first asked Merrill about its bonus plans back in October, Merrill claimed it hadn't finalized the total size of its bonus pool.

Soon after, it was revealed that Thain was angling for a $40 million bonus. When that embarrassing fact went public, Thain backed off.

Four of his top deputies faced no such change of fortune, however, pocketing a total of $121 million as Merrill evaporated.

One beneficiary was Peter Kraus, a Thain hire who started at Merrill in mid-September and quit Dec. 18, the day Bank of America took over.

He walked away with a $24.9 million bonus for those three months of work, which figures to about $249,000 a day. The day he quit, his wife closed on a $36 million luxury Park Ave. co-op, records show.

Kraus declined to answer questions, although a source familiar with the matter said the amount was guaranteed in his Merrill contract.

Cuomo's investigators want to know why Merrill thought such a guarantee was appropriate given the firm's collapse - and why Merrill didn't try to void it.

The bonuses were handed out just before Merrill announced a record $15 billion loss for the fourth quarter,which brought the year's total losses to nearly $27 billion.

How the firm will try to justify handing out bonuses with such a lousy record remains to be seen.

Bank of America spokesman Scott Silvestri said Merrill Lynch was an independent company when Merrill's compensation committee approved the bonuses.

Silvestri added that many of the Merrill bonuses were contractually guaranteed.

Bank of America's top eight executives took no incentive compensation for 2008. The next tier saw their bonuses cut 80%.

Executive bonuses have become a flash point for resentment as the economy continues to stumble and taxpayers find themselves footing the bill for Wall Street's failures.

Two weeks ago, President Obama called the $18 billion in bonuses Wall Street had just awarded itself "shameful."

US markets soar on rescue plan hopes

Now they're smiling.

Lehman to Sell Assets, Sees Loss

This is known as a last-gasp effort to survive. I say stick a fork in it.

Lehman Brothers plans to spin off to shareholders the "vast majority" of its commercial real-estate assets, sell about a 55% interest in its investment-management division and slash its dividend 93%. The firm also predicted a fiscal third-quarter loss of $3.9 billion.

So, what's left?

WaMu, Ford, Fannie, Freddie, Citi Decline

Perhaps more than most other fields, business and finance love acronyms. The headline of this story really caught my eye: WaMu, Ford, Fannie, Freddie, Citi Decline.

The companies are Washington Mutual, Ford (how can acronym be made of it?), Fannie Mae (itself a moniker for the National National Mortgage Association, a GSE, er, a Government Sponsored Enterprise), Freddie (Federal Home Loan Mortgage Corporation, also a GSE), and Citigroup (a conglomeration of Citicorp and Traveler's, Citicorp being the old Citibank).

Regulate, or not?

The dilemma is whether to trust markets to be self-correcting, self-disciplined enterprises, or to regulate them to prevent excesses. Businesses calls, scream, to be free of the shackles of regulation, to be allowed to innovate, to make money and provide jobs, yet all too often fall, fail or implode due to their own excesses. Then, having failed, they plead with the government to rescue them.

Carmen Reinhart, a University of Maryland economist who has studied centuries of financial crises, concludes that blowups happen almost inevitably after financial markets are liberalized or some innovation allows capital to flow more freely.

"Market discipline exists in theory, but in practice, ahead of each crisis, what we see is quite the opposite," Ms. Reinhart says.

And it doesn't take a PhD or much research to know that.

Such discipline clearly broke down at places like Citigroup and Merrill Lynch, which in the past nine months have written down more than $80 billion combined on bad investments. They took too many risks on complex mortgage investments that they created but didn't adequately understand. More broadly, Wall Street's version of market discipline produced the worst housing crisis since the Great Depression – just a few years after a burst bubble in Internet stocks.

... written down more than $80 billion combined on bad investments. 80 billion is a lot of money. What's worse is that these were investments that they created but didn't adequately understand.

"What we have is obviously very dynamic markets that have the ability to run circles around regulators and they have an incentive to exploit every possible opening there is for regulatory arbitrage," says Raghuram Rajan, a University of Chicago economist who sounded alarms about the excesses building up in the financial system back in 2005.

Incentive to exploit? By being able to get away with it, by not being afraid of being caught. Yet they never consider that they might blow up, as Merrill and Citi and others have shown. Greed is allowed to rule.

The regulators are cracking down again now, two or three years too late.

True to form.

A Look at Judge in Bear Case: He's Fair, Funny and Frank

After Bear, Stearns collapsed, two hedge fund managers were indicted for misleading "investors about the health of their portfolio" and "lying about their financial interests in the funds" and "of insider trading."

Unlike most federal judges in Brooklyn, New York City, the 74-year-old Judge Block isn't a former prosecutor, and lawyers say he isn't afraid to challenge the government. The Brooklyn native, they say, is a colorful and down-to-earth jurist who frequently speaks his mind – sometimes stirring controversy as he does.

Sounds good.

The Bear Stearns defendants will "get a fair shake," says Randy Scott Zelin, a defense lawyer who recently lost a securities-fraud trial before Judge Block. "Judge Block won't be influenced by the fact that this case is getting national attention." He "views the people who come before him as parties, not defendants, and treats them like human beings first."

Emphasis added.

No criminal convictions in Judge Block's court were overturned on appeal from 2000 to 2007, according to the New York-based Institute for Judicial Studies, but one case was sent back for resentencing after Judge Block was found to have improperly given a sentence that was lower than the guidelines.

Quite a record: no overturns.

The judge later wrote an opinion piece, published in The New York Times, attacking the death penalty's costs. A framed copy of the article hangs in Judge Block's chambers. Supreme Court Justice John Paul Stevens cited the piece earlier this year in an opinion that concurred with the court's decision to uphold Kentucky's method of lethal injection but also questioned the death penalty's benefits.

He has studied music composition and co-wrote a 1980s off-Broadway musical and several unpublished country-music songs. Judge Block frequently relies on humor in his courtroom. During the racially charged trial of Mr. Nelson, who was accused of causing the death of an Orthodox Jew during the 1991 Crown Heights riots, the judge asked a black witness to define the word "chillin', for somebody who is not a brother."

Cool: not a brother.

On a recent day in his downtown Brooklyn courtroom, Judge Block practiced his Spanish before a Mexican defendant, pointed out his summer interns to litigants and mentioned aloud that he would soon preside over the high-profile prosecutions of Messrs. Cioffi and Tannin. The judge doesn't use his gavel, sometimes doesn't wear his black robe and tells lawyers and spectators not to stand up, as is the custom, when he walks in the courtroom.

I don't like the concept of people standing up before judges: we are a democracy, and judges serve the people.

Workers Face Woes Beyond Job Losses

In the Wednesday morning WSJ newspaper, the forecast was:

The Bureau of Labor Statistics releases June employment data Thursday morning. Economists figure nonfarm payrolls contracted by 55,000 jobs and that the unemployment rate fell to 5.4%, unwinding a bit of May's half-percentage-point jump.

Actual announcement:

U.S. nonfarm payrolls shrank for a sixth consecutive month, decreasing by 62,000 jobs in June, as businesses retrenched in the face of rising costs and a weak economy. The month's unemployment rate held at 5.5%, after rising sharply in May.

So:
55,000 and 5.4%
62,000 and 5.5%

7,000 more jobs lost than forecast, and unemployment rate stayed at five and a half percent.

Dear President Obama, from Bill Gross of PIMCO

A Wall Streeter (well, he works in Newport Beach, CA, but Wall Street is not just an address) gives advice to the soon-to-be-new President. It can be summed up as: stop obfuscating, prime the pump, do some Keynesian deficit spending, and get the economy going. You're inheriting a wicked mess from W and Dick, so get ready to do some heavy lifting. It'll be tough, but here's how to get it done. Fascinating reading.

Thought I would jot down this little note to President Obama.
It’s a little presumptive of course; first that he’ll even be President (he will)
and second that he’d read it (he won’t). But presumptiveness is an inherent
requirement of an investment manager and so I shall proceed.

Dear President Obama:

You have inherited a mess. Your predecessor, fixated on emulating a former Republican icon from a far different economic era, chose to emphasize tax cuts for the rich and excessive consumption for all Americans. He promoted deregulation and free markets when, in fact, the markets and their institutions needed tough love. Over eight years, he failed to put forth a coherent energy policy. He needlessly invaded Iraq and lowered worldwide esteem for this nation as a symbol of freedom and benevolence. But enough about W’s spilt milk.

I myself won’t enjoy paying that near 50 percent marginal tax rate after you remove the current cap on the payroll tax, but my wealthy neighbors and I in Newport Beach should just look at it this way: we’ve had an eight-year lease extension on the “high life.” Now it’s time to give something back and I suspect we won’t be working any less hard. That ol’ Laffer Curve has a certain logic to it, but it only makes sense at the upper margin.

By January, home prices will be down another 10 percent or so and our Japanese-style property deflation will be in full stride. Congress will have had its summer recess though and spent September and October on the campaign trail. They had to get re-elected you know, so those homeowners just had to wait.

You’re smarter than Ronald Reagan and too nice of a guy to distort reality like King George. So let’s start out by dropping all of that “budget neutral” rhetoric and admit where we’re headed. Your administration will produce this nation’s first trillion dollar deficit!

You’ve inherited an asset-based economy whose well has been pumped nearly dry with lower and lower interest rates and lender of last resort liquidity provisions that have managed to support Ponzi-style prosperity in recent years.

this economy will need an additional jolt of $500 billion or so of government spending real quick. It must replace both reduced residential investment and consumption whose decline has placed the U.S. economy near, if not in a recession. Some quick math for you Sir: gross private domestic investment (machines, houses, inventories) has declined by $200 billion since its peak in late 2006. Due to higher unemployment and energy costs, domestic consumption will soon be $300 billion less than it should be if we are to return to historical economic growth rates. According to that old C + I + G formula (scratch the trade deficit for now) when C + I is reduced by $500 billion, then G should increase by that amount in order to fill the gap. The G, Sir, is you – the government deficit, the fiscal stabilizer popularized by Keynes following the Depression. And since the fiscal deficit for 2008 is likely to press $500 billion even before you take the oath of office, well there you have it: $500 billion + $500 billion = $1 trillion big ones, probably by sometime in 2011 or so. It takes time to spend those types of bucks.

Dodo bird not extinct

Get this circularity:

Stocks Stall Out After Asia SelloffStocks were little-changed as investors remained cautious about the financial sector and oil prices dropped on a report that China plans to raise fuel prices. Asian markets tumbled, with Shanghai plunging 6.5% while Hong Kong and Tokyo both lost over 2%. (in the WS Journal at 10.42am)

Earlier: Stock indexes in Hong Kong, Tokyo, Taipei, Bangkok and a host of other markets fell 2% or more. The move was in part a reaction to the Dow Jones Industrial Average, which fell 1.08% overnight to close at 12029.06, the U.S.'s third consecutive decline and that index's lowest close since March 17.

How deep is the ocean?

An electric stock board outside a securities company in Tokyo, Thursday, reflects the Nikkei 225 Index's fall, as renewed concerns about the health of the U.S. financial sector prompted a regional selloff.

That's not half-bad compared to: The Shanghai Composite Index fell 192.24 points, or 6.54%, to close at 2748.87, a fresh 16-month low extending a weeks-long slide that has seen the index drop 20% this month and nearly 50% so far in 2008. Thursday's decline also sent a jolting reminder of Shanghai's recent volatility, coming just a day after the index jumped 5.24%.

Down 6.54% in one day, 20% this month, and 50% just in 2008. Sad, and scary.

Lehman Brothers warned the markets ahead of time about a $2.8 billion loss, and on that conference call boldly proclaimed that the capital it raised would be used for taking more risk, and not "to use the proceeds to further decrease leverage.”

This is a dynamic American firm, eh? I'd say Fuld will be gone next quarter, and Lehman taken over soon after.