Mike Kueber's Blog

October 12, 2011

An agenda for the Occupy Wall Street movement

Most of the media, especially the conservative media, have been critical of the Occupy Wall Street movement because it does not have an articulated list of complaints.  The tradition for such a list goes way back – all the way to The Declaration of Independence:

  • When in the Course of human Events, it becomes necessary for one People to dissolve
    the Political Bands which have connected them with another… a decent Respect to the Opinions of Mankind requires that they should declare the causes which impel them to the Separation
    .”

Matt Taibbi, a writer for Rolling Stone who penned one of the best books on the financial meltdown, recently mingled with the growing throngs in Manhattan and gleaned from them five principal principles:

  1. Break up the monopolies.  By this Matt means breaking up the companies that are too big to
    fail.  This makes perfect sense.  America can’t rely on capitalism to regulate these companies when the companies are able to operate without worrying about being too aggressive because of the government’s implicit guarantee of the companies’ bets.
  2. Pay for your own bailouts.  Matt suggests a tax of 0.1% on all stock/bond transactions. This tax, which I’ve never before heard proposed, would raise enough money to repay America for the 2008 Wall Street bailout and at the same time discourage high-frequency trading.  I’ve never been a fan of day trading, so I am intrigued be this tax.
  3. No public money for private lobbying.  The courts are loath to allow restrictions on lobbying, so it might be difficult to structure this restriction in a way that survives judicial challenge, but conceptually I think this is a promising idea.
  4. Fully tax hedge-fund gamblers.  I recently wrote that I have never heard anyone make a reasonable argument in favor of birthright citizenship.  Similarly, I have never heard any reasonable argument in favor of a bargain tax rate of 15% for “carried interest.”  A Pulitzer Prize should be awarded to any journalist who does the investigative research to identify the crooked politicians who created this loophole.
  5. Change the way bankers are paid.  Eliminate up-front bonuses in favor of bonuses that can’t be redeemed for a few years.  This will force recipients to consider long-term prospects more than short-term prospects.

Matt’s proposals are excellent starting points.  Some of them are obviously contrary to conservative, capitalistic principles.  But I think our government needs to operate in a more pragmatic, less ideological fashion.  Let’s not be afraid to try something just because it doesn’t fit in with the conservative or liberal orthodoxy.  America doesn’t have pure capitalism, and it is counter-productive to pretend that we do.

July 4, 2011

Thin resumes

Filed under: Media,People,Politics — Mike Kueber @ 3:37 am
Tags: , , , ,

Last week, my conservative drinking buddy KB became almost apoplectic when I told him some Michele Bachmann facts that I had gleaned from her profile in Rolling Stone magazine.  He thinks Michele figuratively walks on water, and he doesn’t want to know any facts that don’t mesh with that image.  As far as he is concerned, she is one of the best qualified candidates for President ever.  And don’t get him going on Barack Obama’s thin resume.

I suggested to KB that both Obama and Bachmann had extraordinarily thin resumes prior to running for President and that they had somehow hoodwinked the media into romanticizing their lightweight pre-political careers.

According to myth, Barack Obama was a community organizer before getting into politics.  In fact, he worked as a community organizer for three years before law school.  After getting his law degree in 1991, Obama went to work as a teacher at the University of Chicago and as a civil-rights lawyer for a top-dollar law firm in Chicago.  Six years later in 1997, he became an IL state senator.  The sound of civil-right lawyer, law-school professor doesn’t have the same cachet as community organizer.

According to myth, Michele Bachmann was a tax lawyer before getting into politics.  In fact, she graduated from law school and went to work for the IRS for five years (1988-1993), following which time she decided to become a stay-at-home mother for her four, soon to be five kids, plus caring for 23 foster kids (teen-age girls with eating disorders; no more than three at a time).  In 2000, Bachmann became a MN state senator and in 2006 was elected to Congress.  The professional-mom title doesn’t afford the same gravitas as tax lawyer.

Michele Bachmann worked a few years as an entry-level IRS lawyer and hasn’t practiced law for almost 20 years.  To characterize her as a tax lawyer is highly misleading.  Barack Obama worked three years as a community organizer before he went to law school.  To characterize him as a community organizer is highly misleading.  I don’t know whether to blame the media or credit the candidate’s PR people for this travesty of reporting.

Just as my conservative drinking buddy KB had worn me down for disparaging Michele Bachmann, he showed his magnanimity by suggesting to me that the next great thing in the Republican Party – Florida Senator Marco Rubio – was still too green to run for President because his resume was as thin as Obama’s was when he ran for President.

To keep the argument going, I became the devil’s advocate and suggested that Rubio in 2011 is less qualified than Obama was in 2007.  What do the facts reveal?

  • Rubio graduated from law school in 1996, practiced law and served as a city commissioner for West Miami in the late 90s, was elected to the FL House in 2000, became Speaker of the House in 2006, and in 2010 was elected to the U.S. Senate.
  • Obama graduated from law school in 1991, practiced law and taught for six years, and became as a state senator for eight years before becoming a U.S. senator.  After two years as a U.S. senator, he started running for President.

All things considered, their thin presidential resumes are remarkably similar.  Obama had two more years of experience in the U.S. Senate, but Rubio had significant leadership experience in the Florida House.  Therefore, I concede that KB is correct in saying that Rubio, although underqualified for serious consideration for President, is just as qualified in 2011 as Obama was in 2007.

June 27, 2011

The myth of Michelle Bachmann

My regular drinking buddy KB is a quintessential conservative who fashions himself a libertarian.  His patron saint of politics is Michelle Bachmann, and he never tires of reminding people that she was a tax attorney who raised 23 kids before getting into the dirty, corrupt world of politics.  By way of contrast, the evil Barack Obama had a mysterious academic existence that sandwiched his brief stint as a community organizer.

Earlier this week, I read part of an article by muckraker Matt Taibbi in Rolling Stone magazine that fleshed out Bachmann’s biography.  According to Taibbi, Bachman  graduated from a fourth-tier law school before working for the IRS for five years before deciding to stay at home with her four kids.  Then she decided to be a foster parent for  young girls, being limited to no more than three girls at a time.  According to Taibbi, the current pay for such services in $47 a day per child.

Although Bachmann’s biography is unquestionably noteworthy, it appears to have been embellished.  Literally, she was a tax attorney, but she appears to have worked as an  underling at the IRS.  After graduation from UT law school in 1979, I considered applying to work for the IRS (where I had worked as a file clerk for two years during law school), but didn’t apply because they indicated that they want applicants who were in the top 25% of their class or female or minority.  I’m not sure which qualified Michelle.  Wouldn’t it be ironic if she were an affirmative-action beneficiary, like Obama.

Regarding the kids, Taibbi reports that Michelle had her foster kids for as little as a few months to as long as more than a year.  This makes it questionable whether she “raised them,” as she asserts.

At the end of the move, “The Man Who Shot Liberty Valance,” a reporter states that when the legend conflicts with the facts, print the legend.  I suspect Michelle is counting  on that, but in the world of modern politics, that is no longer true.  Barack Obama did work as a community organizer, and in the scheme of things, that is more impressive than Michelle Bachmann working as a tax lawyer working for the IRS.  She has no real-life business experience and is ill-prepared to lead this country.

December 26, 2010

Sunday book review #6 – Chasing Goldman Sachs by Suzanne McGee

Goldman Sachs has become the fall guy for the 2007-08 worldwide financial meltdown.  Although there were eviler institutions – such as AIG, Countrywide, Washington Mutual, and Fannie Mae – those institutions were humbled and punished, albeit some inadequately.  By way of contrast, Goldman Sachs’ arrogance barely missed a beat (or a bonus) while accepting a multi-faceted government bailout.

The popular conception of Goldman Sachs (GS) is that of an unproductive, money-grubbing leech, or in the famous phrasing of Matt Taibbi in Rolling Stone – “a great vampire squid, wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”  But my hero Warren Buffett has said good things about GS and its chairman Lloyd Blankfein.  At Berkshire’s annual meeting last May, shortly after the SEC accused GS of fraud, Buffett described Blankfein as “smart” and “high grade” and rejected the possibility of trying to oust him – “If Lloyd had a twin brother, I would vote for him.”  Furthermore, I own 150 shares of GS (bought on May 3 for $149 after hearing Buffett’s recommendation, and it is currently selling for $167), so I need to do my due diligence before deciding whether to disown them.  I decided to do that by reading Chasing Goldman Sachs by Suzanne McGee.

Part I of the book – titled Dancing to the Music – consists of four chapters that describe how Wall Street devolved from a staid utility to an extremely risky player.  Among the things I learned in those chapters:

  • Fundamentally, GS and other investment banks play an invaluable role in what author McGee calls the world’s “money grid.”  She uses this term to describe the financial world because she likens it to a heavily regulated utility that delivers an essential service – just like water or electricity – to the economy.  The financial utility (investment bankers) is supposed to be a middleman who merely facilitates the transfer of capital from people who have a lot of money (investors) to those who need a lot of money (businesses).  That sounds like Economics 101.  While commercial banks obtain their money from deposits, investment banks raise their money through equity and bond transactions.  Investment bankers simultaneously serve two clients – buyers who need money and sellers who have money.
  • The problem with this “money grid/utility” analogy is that investment bankers like GS were dissatisfied with the low-risk returns that are generally the lot of utilities.  To generate a higher rate of return-on-equity (ROE), they ventured off into high-risk, highly-leveraged activities.  Instead of working to obtain capital for Main Street businesses (low-revenue work), investment banks started developing exotic financial products for hedge funds and private-equity firms.      
  • High-risk, highly-leveraged activities enabled investment banks to obtain incredibly high ROE rates in the last decade – between 15% and 40%., with GS usually leading the pack, and others jealously trying to catch up by leveraging their capital ever more riskily.  GS’s ROE from 1996 to 2008 was 24.4%, by far the highest in the industry.  Lehman was second at 19.2% and Morgan Stanley was third at 18.6%.  Everyone was “chasing GS.”    
  • The obscene bonus structure at investment banks shifted everyone’s focus to the next quarter’s financial results, with almost no concern for long-term financial soundness or reputation.  For example, in 2007 bonuses at GS averaged $661k per employee, while Lehman’s was $332k.  Although Lehman’s employees should have been happy, they were enviously “chasing GS.”
  • To raise more capital, all major investment banks transformed from partnerships to corporations, beginning with Donaldson, Lufkin & Jenrette in 1970 and ending with GS in 1999.  The partnership structure was especially conducive to restraining risk-taking because it created a feeling of personal responsibility whereas a corporate structure promotes a feeling of personal immunity.

Part II of the book – Greed, Recklessness, and Negligence; the Toxic Brew – consists of three chapters that provide a more technical description of the three major attributes of post-2000 Wall Street that caused the meltdown:

  1. Compensation policies.  Obscene bonuses and perverse incentives to increase revenues without any regard to risk.  This caused investment banks to drift away from their less-profitable utility function of moving capital from investors to Main Street business and toward the more-profitable function of creating exotic financial products for hedge funds and private-equity firms.
  2. Risk-management failures.  Fear (of being beaten by rivals) & greed (for more money) success caused companies to disregard risk; risk managers were marginalized.  In other words, “Chasing GS.”
  3. Regulatory shortcomings.  All federal regulators failed to do their job.  Ever since Reagan, the direction was toward deregulation.  The Office of Thrift Supervision (for thrifts) and the Office of the Comptroller of the Currency (for commercial banks) competed with each other to provide the least interference with their clients who were pushing sub-prime mortgages; derivatives escaped regulators.  The SEC was asleep at the wheel, but the book spends very little time discussing SEC failings.

Part III of the book – The New Face of Wall Street – consists of two chapters that describe how Wall Street needs to work if it is going to avoid another meltdown.  This part of the book seems like an afterthought – like author McGee was so caught up in describing the trees that she never developed a sense of what the forest needed.  Among her suggestions:

  • Foremost, Wall Street should return to its role as an intermediary – i.e., a utility that mere facilitates the movement of money from investors to businesses. 
  • Wall Street should be prohibited from making trades with its own capital, investing in hedge funds or private equity divisions.  This would minimize the conflicts of interest between Wall Street and its clients. 
  • And finally, there needs to be a regulator to monitor financial products, like derivatives. 

McGee is not very optimistic that Wall Street will change its ways.  She cites Citibank’s chairman Richard Parson as declaring that they are going back to their basics.  But his “basics” did not include any professional concern for Citi’s clients or the health of the banking industry.  Rather he was referring to Citibank’s core constituencies – employees and stockholders.  Of course, that is the same motivation that got Citi into all of its trouble – i.e., because its employees and stockholders are just as deserving as those of GS, then Citi should do whatever it can to match the financial results of GS (ROE and bonuses).  As a solution to these distorted values, author McGee suggests that the investment-banking world would be a better place if GS competitors tried to emulate, not GS’s financial results, but rather GS’s best features – i.e., strategic thinking and planning.  However, McGee fails to explain how that is going to come about.

McGee also is discouraged by a recent quote that came from Morgan Stanley’s chairman, John Mack.  He declared that Wall Street couldn’t stop itself from screwing up, that regulators need to “step in and control the Street… force firms to invest in risk management.”  Thus, vigorous regulation is needed, and this led to the Volcker Rule, endorsed by Barack Obama, which recommends a prohibition on speculative investments by investment banks that are not on behalf of their customers. 

Subsequent to the publication of Chasing Goldman Sachs, Congress enacted the 2,000-page Dodd-Frank Wall Street Reform and Consumer Protection Act in June 2010.  (Seems that 2,000 pages is becoming the standard length for major reform legislation.)  Among its major reforms:

  1. No more “too big to fail.”  Regulators were given the authority to seize and break-up troubled financial firms if the firm’s collapse would destabilize the financial system.
  2. Back to basics.  Severely restricts the ability of investment banks to invest in hedge and private-equity funds.  (No more than 3% of the bank’s Tier-1 capital.)
  3. Derivatives.  Extend comprehensive regulation to the heretofore unregulated, over-the-counter derivatives market.
  4. A new consumer protection agency.  Creates a new agency to protect consumers in the areas of credit cards, mortgages, etc. from hidden fees, abusive terms, etc.
  5. Federal Reserve audit.  Mandates a one-time audit of the Fed’s emergency lending programs from the financial crisis.
  6. Eliminates the Office of Thrift Supervision.  Its regulatory assignments are transferred to the Fed (holding companies), FDIC (state savings associations), and the OCC (thrifts).
  7. Securitization.  Requires banks that package mortgages to keep 5% of the credit risk.
  8. Credit-rating agencies.  Establishes a quasi-public agency to regulate conflicts of interest that are inherent in the rating business (after a study by the SEC); authorizes investors to sue and the SEC to fine the rating agencies for bad ratings.
  9. Hedge funds.  Hedge and private-equity funds are required to register with SEC and provide info trades to help regulators to monitor systemic risk.

After reading Chasing Goldman Sachs and other books on the financial meltdown, I find myself impressed with the Dodd-Frank bill.  The bill passed by highly partisan votes in the House and Senate (only three Republican senators supported it – two from Maine and one from Massachusetts), but I don’t know what the Republican objections were.  Perhaps it had to do with their historical opposition to the Democratic philosophy regarding regulating – as Ronald Reagan humorously captured – “If it moves, tax it.  If it keeps moving, regulate it.  And if it stops moving, subsidize it.”  Michelle Malkin called it “the Dodd-Frank monstrosity masquerading as financial reform.

Not discussed in Chasing Goldman Sachs, but something that I have read elsewhere, is the fact that GS is one of the most politically connected entities in America.  Former GS employees rotate in and out of virtually every important financial regulatory office.  Plus, they are not shy about spreading money around where it does the most good.  I was hugely disappointed a couple of weeks ago when I read that my newly elected, Tea Party Congressman Quico Canseco traveled to Washington, D.C. shortly after his election to pick up a $5,000 check from GS.  They obviously bet on the wrong horse before the election and were trying to make amends.  What makes this especially disappointing is the fact that Quico is a lifelong banker, and this might enable him to have outsized importance in future banking developments – just like I could have had with insurance-industry issues or candidate Will Hurd could have had with Afghanistan/Iraq issues.  This campaign contribution suggests that Quico will more likely be an outsized force for bad instead of a force for good.