Bankers robbed the banks

Wasn’t it only in October ’08 that we all were told to believe that the whole financial system had collapsed/was on the verge of collapse and that we need to shell out $780 billion of tax payers money to the exact same bankers has cost us upwards of $5 trillion to-date (per President Obama on the Letterman Show)?

So what happened?

Goldman Sachs (GS) reported $3.4B in profits for the 2Q09. GS plans to pay $18B in total compensation to employees averaging a staggering $600K/employee.

However, Unemployment is still at 16.5% (including semi-employed and people who have given up looking for a job).

That’s what happened.

People are so worked up about the Health Care reform when what we are talking about is A) keeping people alive/healthy which will “actually” benefit the economy B) saving the long term “social” model (yes, social) of Medicare, Medicaid and VA that will not survive unless we control cost and C) most importantly, making it affordable to buy insurance for individuals.

That to me is completely misplaced anger. We all have reason to be angry, reason to feel disoriented, reason to feel like we’ve been had and reason to lose trust. But directing it at Health Care reform is not only wrong it is a disservice to the country. It is much better to focus on reforming our Financial Industry and I contend, the only way to do that by reforming our election campaign finance – remember that issue that was hot before the 2008 elections and oh yes, also before the 2004 elections? Though, I must admit right on the outset that I am not very hopeful that either can happen.

However are some plausible ways to make a dent:

1. Make Banking boring —  Banks should, asPaul Krugman points out, return to being “boring” and provide money at reasonable, conservative rates to support the rest of the society to invest, innovate and develop “real products” not consider credit default swaps as a product….ever! In effect, behave like a Utility Company….like they use to back in the 50s and 60s.

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The real bailout prescription

Banks Only

It seems like I am in a statistical state-of-mind lately.
If you were to go to the IRS website you will find the total number of Individual Income Tax Returns for the year 2008 is: 156,297,000 (Source: http://www.irs.gov/taxstats/ –>Filing Season Statistics –>Filing Season Weekly Reports –> Report for filing year 2008 –> End of Year End Report.)

Let’s take the top 25% of tax payers out and we are left with 117 million individuals.
Next, let’s take the $3.8 Trillion (anticipated government spending across current and pending stimulus and bailouts including Bush bailout) and distribute it evenly to the 117M individuals that filed taxes.

You will arrive at the astounding number of $32,478!

That’s what we all could have gotten (except for the top 25% of earners who shouldn’t need it) instead of the current morass of bailouts and stimulus.

Let’s play this hypothetical scenario out a little further:
Imagine how fast our economy would have recovered if we were given this money, income tax free in a special account, to spend within two years within United States including purchase of airline tickets to fly out of United States (money spent abroad will not count). For any one with credit card loan or mortgage default, there would be additional stipulation that they pay off the loans/mortgage first. I am sure IRS can think of many other stipulations (and that would be fine). At the end of each of the two years we all would have to submit receipts to ensure we complied with the stipulations.

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Why AIG Bonus is an important issue?

I know the furor on AIG bonuses is behind us but I didn’t come across any article that really hit the mark on why it is so important to focus on it — at least to my satisfaction.

Admittedly, Mr. Blow, in his column at the New York Times   came close. On the other hand, another NYT columnist, the famous Mr. Brooks,  in his recent column minimizes the issue — he doesn’t get it.

This is not about the $165M and the pittance it is in comparison to $2T required to “fix” the banks. It is about values that 95% (I believe) of us live by: a value system that has in-built checks within the system and more importantly within us as individuals that prevents us from conducting daylight robberies at the same companies that provide us sustenance. In AIG’s case it is obviously worse — they are not just stealing from the company money they don’t deserve, they are stealing from the American Treasury and the American people. We want to be ensured that we ALL understand the world the same way. This is a very important point — otherwise the foundation for a civilized society is pulled from underneath it. It is akin to driving by making your own rules — there will be accidents and deaths galore. Secondly, and equally importantly, unless we “fix” the thinking that afflicts Wall Street, I don’t know how people like Mr. Brooks and others imagine that we can “fix” the current situation? Despite the $2T bailout.

So in ending, it is not as much about revenge or repatriation, it is about making us believe that we all have the same understanding of rights and wrongs. It is about restoring confidence in our leaders and system more so than restoring confidence in our markets. I would like my leaders to restore my confidence in the following saying: “With great power comes great responsibility,” and stop convincing me that with great power comes great opportunity to fleece the system and unsuspecting people.

Obama’s Budget

I am rather conflicted about the budget that Obama administration unveiled. On the one hand it has the right investment areas — Health Care reform, alternative energy (with revenue generated from carbon emission heavy industries), and education.

It  also focuses on some of the right areas for generation of revenues — like  roll-back of tax cuts for people earning greater than 250K, cut-back of subsidies to agribusinesses, pharmaceuticals and defense contractors.

However, where it fails, in my eyes, is the cut-back required on wasteful government spending — I don’t see much of that. Another troubling sign is that the deficit for the fiscal year 2009 (that ends in Sept) will be $1.75 trillion. That is staggering addition to the government deficit. He predicts that the deficit will fall to $533 billion in the last year of his term — 2013 — but that is far off in the future.

It is a bold new experiment in trying to level the playing field between the haves and the haves not. However, neither is it trim enough nor is it immediate in reducing deficit, and I fear that entropy will take over as time progresses with positive goals less pronounced and negative factors exaggerated when all of this becomes reality.

In a very perceptive article in Washington Post titled, “A Budget Process Hijacked By Selfish Interest,” Steven Pearlstein points out that it was the drive for self interest that resulted in a pluralist approach which forced competing self interests to be looked at collectively by decision makers and helped balance out the overall outcome. He writes, “It’s hard not to see the parallel between the magic of this political marketplace and the “invisible hand” of the economic marketplace as described centuries ago by Adam Smith. It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest,” he wrote famously in “An Inquiry Into the Nature and Causes of the Wealth of Nations.””

 However, it is clear that the system can be manipulated and short term narrow interests can take away the focus from the long term issues that are more potent and dangerous. Also, the politics of Washington ensures that such sweeping, radical bills have more angles to attack it from. And that, I am afraid, will be the undoing of the budget. For, immediate, short term gains are easy for the butcher, the brewer, or the baker and hence that is what they lobby for but long term abstract gains like a balanced federal budget, reformed health care and green energy are hard to visualize. Just like Wall Street, Congressmen will continue to focus on short term gains till uncontrolled upheaval makes long term short term and then, unfortunately, change will be impossible to implement.

Education and its importance

The fecklessness of some of the Republican representatives to the Congress and Republican Senators is hard to believe — they oppose the money allocated for education in the stimulus bill for the reason that money cannot buy good education.

Wrong!

According to the American Federation of Teacher’s website, the average salary of a public school teacher in 2006-2007 was $51,009 and it was the first time since 2003 that it surpassed the inflation rate. And  A University of Washington study had calculated that the recession would lead to cuts of 574,000 school jobs without a stimulus.

I am sorry, but with the finance industry “worker” wolfing in millions on the average as compensation — I bet you even the secretary at these institutions is paid more than $51,000 — and knowing what we all know about the $18.4B taxpayer paid bonuses in 2008, I cannot fathom what these so-called representatives of people are thinking? I rather that the teacher’s average salary rise up to $100,000 so the best and the brightest start becoming teachers than give these exorbitant Wall Street bonuses. Continue reading

How does one solve the apparently unsolvable ills of Capitalism?

Mr. Kristof, an Op-Ed Columnist at the New York Times, wrote an insightful article titled, “Mistresses of the Universe,” that cites good research which relates preponderance of males on Wall Street and the high-risk decisions taken in turn. The article argues for more diversity in all Financial Institutions, especially increasing Women population.  There is no argument against more diversity on Wall Street — Women, African American, Asians, Hispanics, et al. — it can only be positive, however, I do not believe that will solve Wall Street’s ills.

I have seen corporations with great diversity yet forcing a singular agenda and eerie silence at the top no matter what the mix —  don’t see evil, don’t hear evil and hence don’t talk evil being the very easy to adopt philosophy no matter White, Black, Asian, Hispanic, Man or Woman.

Wall Street is burdened by its very nature — it deals with money. Firstly, it will attract people who want to make money, loads of it, and at any cost (Go to, “Why not socialism for all in bad times?” to read mind-numbing utterances from Mr. Welch, exposing himself as yetanother “money at any cost” guy).  The ones that do join the Financial sector due to academic achievement or lack there of (it is the average mind on the average that makes it to Finance) or “my-parents-told-me-so” phenomenon will soon find the temptation too great.

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Obama restricts Executive pay!

The news is just in and I cannot be happier:  New York Times is reporting that the Obama administration plans to impose a cap of $500,000 for executive pay for any firm that will benefit from the next round of bailout money. This restriction is obviously not retroactive but many of the big banks are expected to come to the well once again given the deepening recession.

Yahoo! News reports, “Administration officials have said that the new restrictions would apply only to those struggling large firms that receive “exceptional assistance,” such as the American International Group Inc., Citigroup Inc., and Detroit automakers. They would not apply to healthy banks that receive government infusions of capital.

And Obama’s chief economic adviser, Larry Summers, has proposed that firms that want to pay executives above a certain threshold would have to compensate them with stock that could not be sold or liquidated until they pay back the government funds.”

On the same day, Obama was brave enough to admit that he made a mistake in nominating Tom Daschle for the Cabinet position — I like the courage in contrition displayed by our Commander-In-Chief. 

Hail the new President!